What is Capital Gains Tax?
Capital Gains Tax (CGT) is the tax you pay on any profit when you sell or gift an asset.
The profit is the key part, as this is the difference between the value you paid for the asset and the value at which you sell the asset, which is the gain. The monetary value of the gain is the amount that could be taxable.
For example, if you buy shares in Amazon for £5,000 and sell them after a few years for £20,000. This means you have made a gain of £15,000 which could be taxable.
Who pays Capital Gains Tax?
Anyone can pay CGT if you are selling or disposing of a ‘chargeable asset’. You can pay CGT on your personal assets as well as assets from which you own as a trustee or are disposing of as a personal representative, such as an executor of a deceased person's estate. You don’t have to pay CGT from any gains made on UK government gilts, premium bonds, winnings on betting or the lottery.
Examples of chargeable assets
- Property that isn’t your main residence e.g. a buy to let
- Any personal possessions that are worth more than £6,000 – excludes your car
- Stocks and shares that are not in an ISA
- Business assets
Capital Gains Tax rates
The rate you pay can vary based on your circumstances however, below gives you an indication of the rates you might pay based on your situation.
- 10% or 20% for individuals
- 18% or 28% for residential properties
- 20% for trustees or personal representatives
- 28% for trustees or personal representatives for residential properties
Do companies pay Capital Gains Tax?
You could pay CGT if you are a self-employed sole trader or in a business partnership. Limited companies do not pay CGT, instead they pay Corporation Tax at a rate of 19% (2023/24) for any gains made from selling their assets, if company profits are less than £50,000.
Sole traders and business partners may qualify for Business Asset Disposal Relief (BADR) when they sell or gift all or part of their business. This can also apply to personal company owners providing you have at least 5% of shares and voting rights.
This means you will pay a reduced rate of 10% on any gains. The qualifying criteria for BADR is complex and must consider your personal circumstances, so please speak with your financial adviser or an accountant if you think this may apply to you.
You can claim a total of £1million in business asset disposal relief over your lifetime. You may be able to claim more if you sold your assets before 11 March 2020.
Do you pay capital gains on selling your house?
You do not pay CGT if you are selling your main residence, however any other properties you own could be subject to CGT if you have made a gain. Examples of these properties include buy to let, business premises, land and property that you have inherited.
You do not have to pay tax if you are gifting this property to your spouse, civil partner or to a charity (spouse/civil partner keep the same base cost as donor had).
The tax you need to pay is usually calculated by the price you paid for the property and the price when it has been sold. You can deduct costs incurred as a result of this process such as estate agent and legal fees. You can also deduct improvement or renovation costs, however costs for general upkeep such as decorating cannot be deducted.
If you are selling a property that isn’t your main residence you will be subject to a CGT rate of 18% for the gains that fall within your Basic Rate Tax Band and 28% for the gain that falls above this.
Its also important to know that from 6th April 2020 you must pay the tax you owe to HMRC within 60 days of selling the UK property or land (if the completion date was on or after 27 October 2021). If you fail to pay within this timeframe you could incur interest and penalty charges on the tax owed.
Is there Capital Gains Tax on inherited property?
As a beneficiary of an estate, you will only be subject to CGT if the property or asset has risen in value since you acquired it and you sell at a later date.
If this is the case, then the gain will be calculated by the price at which you sold the asset minus the value of the asset at date of death.
What is the annual Capital Gains Tax Allowance?
Each individual, including children, has an annual capital gains tax allowance, which allows you to make gains on investments of up to £6,000 free of tax and a maximum of £3,000 for trusts – these figures are also reducing further in the 2024/25 tax year to £3,000 per individual and £1,500 for most trusts. For this reason, if your total capital gains in a tax year are less than this amount, you’ll pay no tax.
It is important to note that this allowance cannot be carried forwards into the next calendar year. It’s recommended that you use your tax-free allowance each year – it’s your best bet so that you don’t end up with large capital gains tax bills in the following years.
How to calculate Capital Gains Tax?
To work out your total taxable gains for the year follow these 4 steps:
- Work out your gain or profit from each chargeable asset you have sold or disposed of in the tax year
- Add together the gains
- Deduct any allowable losses
- Deduct the annual CGT allowance (£6,000 for tax year 2023/24)
If your gains are below the allowance there will be no tax to pay. Anything above is classed as a taxable gain.
Working out the tax percentage you will pay
- Work out your gross taxable income and minus your personal allowance and income tax reliefs.
- Add your total taxable gains to your taxable income
- If this gain is below the basic rate tax threshold of £37,700 you will pay 10% on the gain (18% for property)
- If this gain is above the basic rate threshold of £37,700 you will pay 20% on the gain (28% for property)
Let's use an example to show this in more detail. Say you have sold your Amazon shares with a gain of £15,000, with no allowable losses. You deduct the CGT allowance of £6,000 from your gain to give a total taxable gain of £2,700.
|Amazon shares gain||£15,000|
|Capital gains tax (CGT) allowance||£6,000|
|Total taxable gain||£9,000|
You have gross taxable income of £30,000, leaving a taxable income of £17,430 once you have subtracted your personal allowance of £12,570.
|Gross taxable income||£30,000|
Adding the gain of £9,000 to your taxable income is £26,430 which is below the basic rate tax threshold. You will therefore pay 10% on £9,000 which equals £900 of tax to pay to HMRC.
|Total income||£26,130 (below basic tax rate threshold)|
|Tax to HMRC (10%)||£900|
How do you pay?
You must report your gains on a Self-Assessment Tax Return the tax year after you sold or disposed of the asset. If you don’t usually complete a tax return you will need to register by 5th October each year. You will then pay your tax bill on 31 January after the tax year in question.
Note: This excludes residential property gains as described earlier. You must pay the tax you owe to HMRC within 60 days of the sale.
You can also pay straight away at https://www.gov.uk/capital-gains-tax/report-and-pay-capital-gains-tax.
You will still need to report your gains in your tax return if both of the following apply:
- The total amount you sold the assets for was more than 4 times your allowance, rising to £50k on 6 April 23
- You're registered for self assessment
If you need help with your tax return, please speak to your financial adviser who can help support you.
Can you carry forward Capital Gains allowance?
Any unused annual Capital Gains allowance cannot be carried forward to future years. What is not used is lost at the start of a new tax year. However, you do have other options when it comes to reducing the amount of capital gains tax that you pay, from utilising capital losses to using your spouse or civil partner.
If you have made a loss in previous tax years you are able to carry these forward indefinitely until they have been used to offset any gains you may have. You can claim these up to 4 years after the end of the tax year that you disposed of that asset. However, any losses will need to be registered with HMRC within four years after the end of the tax year in which you made the loss. This can be done by either including them on your tax return or writing to HMRC if you’ve never made a gain and aren’t registered for self-assessment.
Losses used to reduce capital gains are referred to as allowable losses, with the losses that you report deducted from the gains made that same year. Should your total gain still be above the tax-free allowance after you’ve reported your losses from the same tax year, you’re instead allowed to deduct unused losses from previous losses to reduce your gain. Should you reduce your gain so that it ends up under the tax-free allowance, you can carry forward any remaining losses to a tax year in the future.
How can we help?
Paying tax is part of everyday life. Our tax planning services adopt a strategy to ensure your money is working as hard as possible and that allowances are maximised wherever appropriate. We aim to focus our efforts on building tax efficient portfolios that are designed to meet the long-term needs of our clients.
Tax and its legislation continually evolve, requiring a prudent financial adviser at the forefront of these changes to guide you through the complexity. If left alone financial plans can quickly become unsuitable as tax rates are increased, reliefs are reduced, and eligibility criteria tightened.
If you are keen to find out more about our tax planning services and how we can add value to your wealth, please get in touch and arrange a free initial consultation.
Please note: The Financial Conduct Authority (FCA) do not regulate tax planning.