Income tax and VAT often dominate the headlines, yet capital gains tax can matter just as much for investors, landlords and anyone selling an asset that has increased in value.
And many more of us are going to be paying it, because the annual exempt amount has steadily fallen. It was £12,300 in 2022/23, reduced to £6,000 in 2023/24 and then to £3,000 from April 2024, where it remains.
This is making it essential to understand how CGT works, how much it will cost, and how we can reduce it.
What exactly is a capital gain?
Capital gains tax, usually shortened to CGT, is a tax on the profit you make when you sell or otherwise dispose of certain assets. It is the capital gain, the amount the item has increased in price that is taxed, not the full amount you receive.
Which assets are subject to capital gains tax?
CGT is not payable on personal belongings, or “chattels”, such as jewellery, paintings and antiques, worth less than £6,000. Other exempt assets include gilts, foreign currency, and classic cars. Your main home is usually exempt, provided it qualifies for private residence relief.
But most other assets, including shares held outside an ISA or pension, a second home, a buy-to-let property, cryptocurrency, business assets and valuable personal possessions are liable for CGT.
You need to report your capital gains through your Self-Assessment form, and the deadline to pay is 31 January following the end of the relevant tax year.
How much capital gains tax will you pay?
Capital gains tax rates
How much you pay depends on your income tax rate. Basic-rate taxpayers pay 18% on gains, while higher and additional-rate taxpayers pay at 24%.
As a result, CGT can apply in a wider range of circumstances, including where individuals dispose of investments held outside tax-efficient wrappers, such as portfolios that are periodically rebalanced, residential property that is not a main home, or other chargeable assets
A gain realised without thinking about tax can create an unexpected liability, while careful timing, use of allowances and tax-efficient accounts can help improve the outcome.
How to calculate your CGT liability
To calculate your CGT liability, first work out your taxable gain by subtracting the price you bought the asset for from the sale price. Then, deduct your CGT allowance (£3,000 for the current tax year) from this gain. The remaining amount may be subject to CGT at the rate based on your tax band and the asset type.
Capital gains tax calculation examples
For example, if you’re a higher-rate taxpayer and you made a £10,000 gain from selling shares. You’d pay £1,680 in CGT on your gains (24% of £7,000), after deducting your £3,000 annual tax-free allowance.
If you are a basic rate payer making the same profit your liability is calculated at 18%, amounting to £1,260.
How can you cut your capital gains tax bill?
Use tax-efficient investment accounts
You can help protect investments from CGT by putting them inside an ISA, but the rules limit investments to £20,000 a year.
Transfer assets to a spouse or civil partner
You may wish to consider taking a more strategic approach. For example, assets can be transferred to a spouse or civil partner without triggering Capital Gains Tax (CGT), enabling both individuals to utilise their separate CGT allowances and potentially reduce the overall tax liability.
Time your disposals carefully
You can also consider the timing of disposals. For example, disposing of up to £3,000 of assets before the end of the UK tax year on 5 April, and a further £3,000 shortly after the start of the new tax year on 6 April, may enable you to use two years’ worth of annual exemptions
Offset gains with capital losses
You may be able to reduce your CGT liabilities by taking careful note of losses you have made from selling assets. These capital losses can be used to offset gains elsewhere, reducing your overall tax liability.
Plan before you sell
Whatever you do, CGT should be considered before an asset is sold, gifted, transferred or exchanged. Once the transaction has happened, the planning options become much more limited.
Getting expert help with capital gains tax
Planning your asset disposal carefully could help you reduce your CGT liabilities, but you may find it easier with some expert help.
At Continuum we can help you plan your asset disposals to make the most of your allowances, and other techniques such as ‘Bed and ISA’ or ‘Bed and SIPP’ which could help reduce the taxman’s cut of your profits.
If you have assets you plan on disposing of, call us at Continuum first.
HMRC tax receipts and National Insurance contributions for the UK – GOV UK
This article is intended for general guidance only and is based on the opinion of Continuum it does not constitute financial advice. Individual circumstances vary, and you should consider seeking advice from a regulated financial adviser before making any decisions about your tax planning.
The Financial Conduct Authority does not regulate taxation advice.
Levels and basis of reliefs from taxation are subject to change and their value depends upon your personal circumstances. We recommend seeking professional advice on personal taxation matters.
The value of an investment can go down as well as up. When investing Capital is at risk.
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