Capital Gains Tax explained
When do you have to pay CGT? What exceptions are there? And how do you pay it? Get to grips with Capital Gains Tax with our one-stop guide
Key points
Capital Gains Tax (CGT) is levied on profits from the sale of assets, such as property, shares, or art. Rates range between 10% and 28%, depending on income and asset type
Certain assets are exempt from Capital Gains Tax, including main homes under specific conditions, cars for personal use, and personal possessions valued under £6,000
Effective financial planning requires a keen understanding of CGT implications, which influence asset-sale strategies and can impact your overall tax obligations
What is Capital Gains Tax?
Capital Gains Tax is a tax paid on profits you accrue from selling your assets. It applies when assets, such as shares, property, or art, increase in value. The gain is deemed to be the increase in value during your ownership.
Certain assets are exempt from CGT. These include your car, personal possessions up to £6,000, and usually your main home. However, second homes, investment portfolios, and business assets are liable.
When do I have to pay Capital Gains Tax?
Capital gains tax is due when you sell an asset for a profit. This includes houses, shares, or artwork. The tax obligation arises not at the sale, but when filing your tax return.
For instance, if you sold an asset in June 2023, you'd need to report it by January 2024.
It's vital to track sale dates and profits, as these affect your tax payable. Large profits from sales can push you into a higher tax bracket, impacting your tax obligations significantly
How much CGT will I have to pay?
When considering Capital Gains Tax, several factors affect the amount due. Here's what you need to know:
Rates of Capital Gains Tax: Your tax rate varies with your income and asset type. Typically, rates range from 10% to 28%. Residential properties often incur higher rates than stocks or bonds
Your tax-free allowance: An individual is entitled to profit by up to £3,000 from the sale of an asset in the 2024-25 tax year before they're liable to pay CGT. A couple can profit by up to £6,000 in the same circumstances before being liable for CGT
Deductions: You can deduct costs such as improvements and transaction fees to lower your gain on which tax could be payable
Examples of CGT calculations for different asset types
Selling a property: Purchasing a house at £200,000 and selling at £300,000 results in a £100,000 gain. After the tax-free allowance, the taxable gain decreases. The exact tax depends on your income tax band
Selling shares: Buying shares for £5,000 and selling them for £15,000 gives a £10,000 gain. After similar deductions, the remaining gain is taxed at your applicable rate
What is exempt from Capital Gains Tax?
CGT is charged on profits from selling property or investments. However, not all assets or scenarios are taxable.
Knowing the exemptions can significantly reduce your tax bill. This section clarifies which assets are exempt, under which conditions, and addresses common misconceptions.
List of exempt assets
Your main home, also known as 'Principal Private Residence'
Cars for personal transportation
Personal belongings up to a value of £6,000, excluding item sets
Winnings from betting, lotteries, and gambling
Government bonds and gilts
Conditions for exemptions
The asset must have been your primary residence during ownership
Personal belongings must not be part of a set exceeding £6,000 in total value
Vehicles must be used for personal purposes, not business or investment
Common misconceptions about exemptions
It is often incorrectly believed that all personal possessions are exempt; in fact, only those under £6,000 qualify
It's also widely believed that property owned for a long period becomes exempt. This is incorrect, unless it meets specific conditions like the Principal Private Residence Relief
Do I have to pay CGT when I sell a property?
When selling a property, you may need to pay Capital Gains Tax on any profit. This tax is applicable if the property sold is not your main residence. For your primary home, you often avoid this tax due to Private Residence Relief.
To calculate your gain, deduct the purchase price from the selling price. Also, include costs from buying, improving, or selling the property. If you end up with a profit, that amount could be subject to tax.
How do I pay CGT?
Paying Capital Gains Tax involves several steps. First, you'll need to calculate your total taxable gains for the financial year. This requires summing all profits from asset sales liable for this tax.
After working out your total, subtract any allowable losses and exemptions to determine your net gain.
It's crucial to remember the payment deadline for capital gains tax. For UK taxpayers, it is due by the 31st of January following the tax year end in which the gains were made. Missing this deadline can result in penalties, so it is advisable to mark it on your calendar.
For a smooth tax payment process, use HM Revenue and Customs’ (HMRC) online services. Through their platform, you can file your tax return and make payments.
Setting up reminders for deadlines and maintaining detailed records of all transactions can prevent last-minute rushes and errors.
Additionally, consulting with a tax advisor can offer personalised guidance and assist in navigating complex scenarios effectively.