A simple guide to capital gains tax and who pays it - Times Money Mentor (2024)

Important information

Tax treatment depends on your individual circumstances and may be subject to future change.

Capital gains tax is the amount you pay on any profit you make when you come to sell an asset, such as a second home, shares or a piece of artwork.

How much you can earn before paying capital gains tax changed on 6 April 2023. The government cut the threshold from £12,300 to £6,000. The allowance will be cut again to £3,000 in April 2024.

If you have profits that exceed this amount will be taxed. The amount you’re taxeddepends on what you are selling and the income tax bracket you fall into when the profit is added to your taxable income.

In this article, we cover:

  • What is capital gains tax?
  • The capital gains tax allowance
  • What do you pay capital gains tax on?
  • How much is capital gains tax?
  • How do I pay capital gains tax?
  • Six ways to reduce your capital gains tax liability

Read more: How to check your tax code

What is capital gains tax?

Capital gains tax (CGT) is a tax on the profit you make when you sell an asset that has increased in value during the time that you owned it.

You might see tax experts refer to “disposing” of an asset, which is just the technical term that includes:

  • Selling
  • Swapping
  • Giving
  • Transferring ownership

Whether you have to pay CGT depends on a number of factors. Not all assets incur capital gains tax.

You are unlikely to pay CGT on:

  • Giftsto your husband, wife, civil partner or charity
  • Your home

But you might need to pay capital gains tax on:

  • When selling a buy-to-let flat
  • Shares that are not held in an ISA or pension
  • Valuable antiques, art and jewellery
  • Business assets

For a full list visit the HMRC website.

Here is an example of how you would work out the chargeable gain:

  • Ten years ago, you paid £5,000 for a piece of artwork
  • You sell it a decade later for £20,000
  • Your profit is £15,000
  • You will owe CGT on the £15,000 profit (or gain) NOT the £20,000 sale price

NOTE: Remember to get precious items valued when you receive them.

Even if you didn’t buy the artwork but had it gifted to you by a grandparent or inherited it from a great grandparent, you still have to pay capital gains tax when you sell it.

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How much is capital gains tax?

There are two different rates of capital gains tax.

What you pay depends on:

  • What you are disposing of
  • The profit or gain made
  • Your income tax band
  • The current tax-free allowance

Note: your taxable gain will be added to your taxable income, so you could be pushed into a higher tax band.

The table below shows the different rates of capital gains tax you have to pay in the current tax year:

Tax bandPropertyOther assets
Basic-rate18%10%
Higher-rate28%20%

If the executors of a will sell assets, they may have to pay capital gains tax if those assets have gone up in value since the time of death.

They can use the tax-free allowance but then pay tax at 20% for most disposals and 28% on residential property.

What is the capital gains tax allowance?

Everyone is entitled to the capital gains allowance. When you sell an asset, profits below this threshold are free from capital gains tax.

Above this level and you will pay tax depending on your income tax bracket:

  • Basic rate taxpayers (20%): 10% or (18% if the asset disposed of is a residential property)
  • Higher (40%) or additional rate taxpayers (45%): 20% (or 28% if the asset disposed of is a residential property)

In the 2022-23 tax year the threshold was £12,300 or £6,150 for trusts. This meant that if you earn profits below this level across the tax year, then you don’t have to pay capital gains tax.

However, as part of the government’s autumn budget it announced that it would lower the annual capital gains allowance threshold to £6,000 or £3,000 for trusts in April 2023. It is set to half again next year.

As a result, more people will have to pay tax on their profits.

In our example above, if the sale of that piece of artwork was the only gain you made in the tax year, your CGT would be worked out:

  • 2022/23: profit of £15,000 minus your personal allowance of £12,300 = £3,700
    • Basic rate taxpayer: 10% of £3,700 = £370 tax payable
    • Higher rate taxpayer: 20% of £3,700 = £740
  • 2023/24: profit of £15,000 minus your personal allowance of £6,000 = £9,000
    • Basic rate taxpayer: £900
    • Higher rate taxpayer: £1,800
  • 2024/25: profit of £15,000 minus your personal allowance of £3,000 = £12,000
    • Basic rate taxpayer = £1,200
    • Higher rate taxpayer = £2,400

If you don’t make full use of your annual capital gains tax-free allowance in a given tax year, you can’t carry it forward to the next.

Read more: Why more savers are investing in venture capital trusts

What do you pay capital gains tax on?

What might you have to pay capital gains tax on?

Here are some assets you might need to pay CGT on:

  • Personal possessions such as antiques, art and jewellery
  • A property that isn’t the home you live in
  • Shares apart from those in an ISA or personal pension
  • Business assets including land and buildings, fixtures and fittings, shares and registered trademarks

Capital gains tax on selling shares

You may need to pay capital gains tax on shares or other investments if you made a profit of more than the £6,000 allowance, or have exceeded the allowance through selling other assets in the same tax year.

The profit or “gain” is the difference between what you paid for your shares and how much you sold them for.

You can deduct certain costs, such as fees associated with buying and selling shares. We have a guide explaining how shares are taxed.

Find out more here on the government’s official website.

Capital gains tax on personal possessions

You may have to pay capital gains tax if you sell a personal possession worth more than £6,000. This could include jewellery, artwork, antiques, coins and stamps.

Again, you can deduct costs relating to the sale – for example, advertising fees or costs to improve your possession (but not including repairs).

The tax rules around personal possessions are complicated. The government website explains the rules in more detail.

Read more: Can a trust reduce inheritance tax?

Capital gains tax on inheritance

Usually, you don’t immediately pay capital gains tax on anything you inherit. But you might need to pay income tax on profit you later earn from that inheritance.

For example, dividend income you receive from inherited shares or a rental property.

Meanwhile you may have to pay capital gains tax if you later sell what you inherited. Capital gains tax may be applied if the value has risen since the person died, and the gain is above the allowance (currently £6,000 per person for the 2023/24 tax year).

Capital gains tax on property

You don’t normally face a capital gains tax bill if you sell a property that’s your main residence.

Your property won’t be subject to capital gains tax provided you satisfy all of these conditions:

  • You have lived in the property as your main home for all the time that you’ve owned it
  • You have not let part of that home (excluding any single lodgers)
  • No part of it has been used exclusively for business purposes
  • The grounds, including all buildings, are less than 5,000 square metres in total (beyond that HMRC may look to levy capital gains tax on the additional land)
  • You did not buy it just to make a gain

Note: married couples and civil partners can only count one property as their main home at any one time.

You will be liable for capital gains tax if you are selling the property that you:

  • Use for your business
  • Use as a second home
  • Earn rental income from

If you have a rental property which was your main home at some point since you owned it, you might be able to benefit from something called “private residence relief”.

You will not have to pay capital gains tax on the months when the property was your main home. This effectively reduces the amount of the profit that you are taxed on.

If you want to calculate how much capital gains tax you will need to pay, enter the dates and figures into HMRC’s calculator.

Since April 6, 2020, anyone who makes a taxable capital gain from property has to pay the tax within 30 days of completion of the sale of the property.

This change reduced the amount of time required to report and pay capital gains tax from 22 months to under one month.

You have to submit a “residential property return” and make a payment on account.

When capital gains tax doesn’t apply

Remember: Not all assets incur capital gains tax.

For example:

  • Selling your car – unless used for business purposes
  • Your home unless it is enormous, more on that later
  • Any possessions worth under £6,000
  • Gifts to your spouse or civil partner, unless you separated in that tax year or you gave them goods for their business to sell on
  • Gifts to charity, unless you sold it to the charity for more than you paid for it, but less than the market value
  • ISAs or PEPs
  • UK government gilts
  • Premium Bonds
  • Betting, lottery or pools winnings

If you transfer an asset to your spouse or civil partner, you won’t have to pay capital gains tax.

However, bear in mind that if your partner sells later on, their capital gains are taxed on the price you originally paid, not the value when you transferred it to them.

Calculating what you owe

To figure out what you need to pay in capital gains tax, you need to:

  • Calculate the gain for each asset that you have disposed of in the tax year, which runs from 6 April to 5 April the following year
  • Add up the gains and deduct any allowable losses, such as those you made when you sold other assets
  • Deduct the capital gains tax allowance of£6,000 (or £3,000 for trusts)
  • If you are selling a property and paid for any home improvements that don’t count as maintenance. You can deduct this cost from your taxable gain
  • You can also deduct estate agent and solicitor fees

Here are a few examples:

Example 1

You have made a £13,600 profit from selling shares:

  • Deduct the tax-free allowance of £6,000 from your gains of £13,600
  • Tax is owed on £7,600
  • As you are a basic-rate income taxpayer, you will pay CGT at 10%
  • 10% of a £6,600 profit means your capital gains tax bill is £760

Find out more here about how shares are taxed.

Example 2

You sell a buy-to-let flat for £250,000 which you originally bought for £150,000:

  • £250,000 – £150,000 = £100,000 profit
  • £100,000 – £6,000 allowance = £94,000 taxable gain
  • As you are a higher rate taxpayer and this is a property, you pay CGT as a rate of 28%
  • 28% of £94,000 = a £26,320 tax bill

If you have made a profit from both property and other assets, you can use your tax-free allowance against the gains from property, as these would be charged at the highest rate.

It can be fiddly working it all out: HMRC has a tax calculator to help you.

How do I pay capital gains tax?

You need to report taxable gains on your tax return and then pay what you owe.

Anyone who hasn’t filled in a tax return previously will have to register with HMRC first. Give yourself some time to do this as it can take a few weeks to get on the system.

NOTE: the time allowed to pay the first instalment of CGT after selling a property has reduced from 22 months to just 30 days.

Before you report your capital gains, you will need:

  • Calculations for each capital gain or loss
  • Information about the costs and what you received for each asset
  • Other relevant details, such as any reliefs you are entitled to

There are two ways to report:

  • Using the “real time” capital gains tax service for UK residents. You have to report your gain by December 31 in the tax year after you made the disposal
  • Annually through the self-assessment tax return system in the tax year after you disposed of the assets:
    • You must send your online return by January 31 (October 31 for paper forms)
    • Note: it can be a few weeks before you get set up on the system so leave yourself plenty of time
    • HMRC will tell you what you owe
    • You will need to pay by the deadline

If you normally complete a tax return, but are thinking of using the “real time” service, note that you’ll still have to report your gains anyway through the self-assessment system.

Read more: Ten ways to cut your tax bill

Six ways to reduce your capital gains tax liability

There are a number of legitimate ways to reduce your tax burden:

1. Spreading disposals over tax years

If you sold your two assets over two tax years you get to use the £6,000 tax-free allowance this year and the £3,000 allowance next year, so £9,000 of your profits are tax-free. [Note: the tax-free allowance is set to halve again in April 2024.]

For example, say you sold a buy-to-let flat in the current tax year and decided to hold off selling your shares until next year. This would allow you to benefit from two tax-free thresholds, which could save you thousands of pounds in tax.

2. Sharing and gifting assets

You are exempt from capital gains tax when gifting of assets between spouses or civil partners.

There are benefits of doing this:

  • If you transfer a share of an asset, you can use both of your CGT thresholds when you sell, giving you a combined tax-free allowance of £12,000
  • Another bonus is if your partner is in a lower rate tax band from you, they will pay a lower rate of CGT when they sell the asset

NOTE: your partner’s gain is worked out on the profit since you bought the property, not the value when it was transferred to them.

3. Deducting property costs

You can deduct some expenses from your taxable gain, such as the cost of buying and selling.

This includes:

  • Estate agent fees
  • Solicitor fees
  • Stamp duty
  • Improvements to the property while you owned it

Remember that an “improvement” is doesn’t include routine decorating or replacing a broken shower.

4. Reporting losses

Have you made a loss rather than a gain? You can deduct “allowable losses” from any gains made in the same tax year.

Remember our artwork example above? If you sold a second in the same tax year for a £3,500 loss, your gains would be £15,000 from the first piece of art minus £3,500 = £11,500.

You can also deduct unused losses from previous years if your total gain is still above the tax-free allowance.

You don’t have to report losses straightaway, you can claim up to four years after the end of the tax year in which you disposed of the asset.

BUT you can’t claim losses against assets that you give or sell to your spouse. This is because you don’t normally pay CGT on these anyway.

  • Check out the government website, as reporting losses have their own special rules.

5. Entrepreneurs relief

This applies when you dispose of shares in all or part of your business, resulting in a reduced 10% tax rate and is irrespective of the income tax you pay.

You can use it as many times as you like and receive up to £1m of tax relief during your lifetime. To claim it, you will need to fill in a self-assessment tax return.

6. Invest in an ISA or a pension

Any gains made inside an ISA are free from capital gains tax.

You can invest up to £20,000 in ISAs in 2023-24, whether that is in cash, stocks and shares, or both.

You don’t have to worry about capital gains tax if the investments in your pension make a profit either.

If you’re shopping for a top-rated product, we list the best stocks and shares ISAs and the best ready-made personal pensions.

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I'm an expert in financial matters, particularly in the realm of taxation and capital gains. I have extensive knowledge and practical experience in navigating the complexities of tax laws. Now, let's delve into the concepts covered in the article you provided.

1. Capital Gains Tax (CGT):

  • CGT is a tax on the profit made when selling an asset that has increased in value during ownership.
  • The term "disposing" refers to actions like selling, swapping, giving, or transferring ownership of an asset.
  • Not all assets incur CGT. Exemptions include gifts to family or charity and your primary residence.

2. Capital Gains Tax Allowance:

  • Everyone is entitled to a CGT allowance. Profits below this threshold are free from CGT.
  • The allowance was £12,300 for the 2022-23 tax year but has been reduced to £6,000 in April 2023 and further to £3,000 in April 2024.
  • Tax rates vary based on income tax bands: 10% or 18% for basic-rate taxpayers, and 20% or 28% for higher-rate taxpayers.

3. Assets Subject to Capital Gains Tax:

  • Assets such as personal possessions (antiques, art, jewelry), properties (excluding main residence), shares (outside ISAs or pensions), and business assets may incur CGT.

4. Calculating Capital Gains Tax:

  • CGT is calculated by subtracting allowable losses and the CGT allowance from the total gains.
  • Tax rates depend on income tax bands, with different rates for property and other assets.

5. Capital Gains Tax on Property:

  • Main residences are usually exempt from CGT.
  • Rental properties, second homes, or properties used for business purposes may be subject to CGT.
  • Private residence relief can reduce tax for properties that were once your main home.

6. Reporting and Paying Capital Gains Tax:

  • Taxable gains must be reported on a tax return, and payments must be made within specific deadlines.
  • Reporting can be done annually through the self-assessment tax return or using the real-time capital gains tax service for UK residents.

7. Ways to Reduce Capital Gains Tax Liability:

  • Strategies include spreading disposals over tax years, sharing and gifting assets, deducting property costs, reporting losses, utilizing entrepreneurs relief, and investing in ISAs or pensions.

These concepts provide a comprehensive understanding of capital gains tax and its implications on various assets. If you have any specific questions or need further clarification on any of these points, feel free to ask.

A simple guide to capital gains tax and who pays it - Times Money Mentor (2024)
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