What is capital gains tax?
If you’re selling certain assets of high value or a second property, you’ll probably have to pay capital gains tax on your profits.
Capital gains tax (CGT) is a tax on the profits earned from selling an asset or a property belonging to you (excluding your main residence). You only pay CGT on your overall gains above your tax-free allowance – known as the ‘annual exempt amount’.
In the 2021/22 tax year this amount is £12,300, so you can make this much in profit before you pay any tax. Married couples or those in civil partnerships can double this to £24,600 by pooling their allowances together. The government announced in its 2021 March Budget that these levels have been frozen until 2026.
Depending on your income tax band, you will pay the following levels of CGT when you sell an asset or property:
- Basic rate taxpayers
- The CGT to pay on assets is 10%
- The CGT to pay on property is 18%
- Higher/additional rate taxpayers
- The CGT to pay on assets is 20%
- The CGT to pay on property is 28%
Difference between assets and property
CGT affects assets and property differently when it comes to how much you’ll pay:
An asset could be a piece of art, jewellery, or an antique to name a few – but several assets are exempt from CGT, such as your family home, any personal belongings worth less than £6,000 or a car that is for personal use. Investments are assets, and if you’re selling things such as shares, funds, investment trusts or other financial products you will be charged CGT if you go over your annual allowance (depending on your tax band).
You will have to pay CGT if the property you are selling is a second home or a source of rental income. CGT needs to be paid within 30 days of completion of the sale or disposal of the property.
You won’t pay any CGT on the sale of your main residential home, providing that it’s never been used for business purposes while you’ve lived in and owned it, and it covers less than 5,000 square meters (including the grounds).
There are rules around CGT if you live in the UK but are selling an asset or a property abroad (you may be liable to pay CGT on gains made from the sale). It’s worth getting advice about a sale abroad if this affects you.
When is Captial Gains Tax not required?
You won’t need to pay CGT on a gift to your spouse or civil partner, or to a charity. You’re also not required to pay CGT on certain financial assets, including gains made from ISAs or PEPs (the forerunner of ISAs), UK government gilts, Premium Bonds and winnings from betting, pools, or lotteries.
Working out your Captial Gains Tax
Calculating CGT can be confusing, as you will need to have the details for each capital gain or loss, along with information about the costs involved in the sale and what you received for each asset. You’ll then have to factor in your income tax band and the percentage of CGT you’ll have to pay on the gains you’ve made.
Because it’s so complex, a financial adviser is best placed to help you get this all done easily. They will also be aware of any tax reliefs you may be entitled to claim during the calculations, or whether there are other ways to reduce or eliminate your CGT (like gifting to your spouse or civil partner).
Our advisers can help you make sense of any CGT affecting you and your assets, helping you to arrange your investments in the best way to make the most of their potential, including when you sell them.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes that cannot be foreseen.
For specific tax advice please speak to an accountant or tax specialist.