If you sell or otherwise dispose of an asset and make a profit from doing so, you may have to pay tax on the gains you make, known as Capital Gains Tax (CGT).
So, if you’re selling a property or some shares that have gone up in value, for instance, you could face a CGT bill, depending on how big a gain you’ve made.
But which assets does Capital Gains Tax apply to, and how much do you need to pay? Our guide covers everything you need to know.
How does Capital Gains Tax work?
Capital Gains Tax is applied specifically to the amount you gain from offloading an asset, which is above your yearly CGT allowance, known as the Annual Exempt Amount. For 2023/24, this is £6,000, a significant reduction from the previous tax year’s allowance of £12,300.
The allowance will be reduced again to £3,000 in the 2024/25 tax year.
Chris Springett, Tax Partner at wealth management and professional services firm Evelyn Partners, said: “Most CGT comes from a small number of taxpayers who make large gains. The halving of the allowance increases the burden on investors and property owners at the other end of the CGT spectrum – those who have made relatively modest gains but are nevertheless drawn across a much-reduced threshold. Moreover, these taxpayers may need to file tax returns for the first time to report capital gains, causing a new admin headache.”
Capital gains tax receipts have more than doubled over the last five years, with the government collecting £18.1 billion in CGT in the 2022/23 tax year, compared to £7.8 billion in 2017/2018. The public now pays more in this tax than they do in Stamp Duty.
Sean McCann, Financial Planner at NFU Mutual, said: “More buy-to-let landlords are offloading property because of increasing mortgage rates and are being hit based on the rise in the value of their property.”
“In addition, the annual exemption was slashed from £12,300 to £6,000 last month and is set to be reduced to £3,000 next April. This led many landlords to bring forward the sale of the property to benefit from a higher tax-free exemption.
While the government is projected to take in slightly less CGT in the 2023/24 year, numbers are expected to rise again in the following years, with receipts set to reach £26.1 billion in 2027/28.
How do I work out Capital Gains Tax?
When working out how much Capital Gains Tax you might need to pay on disposal of an asset, bear in mind that you don’t pay the tax on the full amount you received, just the profit you made.
For example, if you own a second home which you bought for £300,000 and you sell it for £350,000, only the £50,000 profit is taxable. Once your £6,000 allowance is deducted, this means that CGT is payable on the remaining £44,000 of your £50,000 gain.
Selling an asset isn’t the only reason you might have to pay Capital Gains Tax on it – if you swap it for something higher in value, or get an insurance payout after the asset is lost or destroyed, you’ll usually have to pay CGT on any profit too.
You may have to pay Capital Gains Tax on a gift, if the asset is thought to have increased in value between when you bought it and gifted it, even if you made no actual profit. In this case, the “profit” is calculated as the difference between the amount you purchased the asset for and its market value on the date it was gifted. However, you do not usually need to pay Capital Gains Tax for gifts to your spouse or civil partner, or a charity.
Capital Gains Tax rates
The Capital Gains Tax rate you’ll pay depends on which Income Tax band you fall into, and what kind of asset you have disposed of.
If you pay higher or additional rate Income Tax, the CGT rates are fixed. You must pay 28% on your gains from a residential property, and 20% on your gains from other chargeable assets.
If you pay the basic rate of Income Tax, you add your taxable gains from disposing of the asset (after applying your £12,300 annual allowance) to your taxable income from that year (after applying your £12,570 personal allowance and any other tax relief you may have).
If this amount still falls within the basic income tax band, you’ll pay 18% on gains from a residential property that isn’t your main home, and 10% on your gains from other chargeable assets. If the amount goes above the basic rate tax band, you’ll pay the higher rates listed above.
Which assets do I have to pay Capital Gains Tax on?
Not everything is subject to Capital Gains Tax. The assets that are taxable under CGT are as follows:
- Most personal possessions worth £6,000 or more
This might include jewellery, antiques, and so on.
This does not include your car, unless you’ve used it for business purposes. It also does not include things which might have a limited lifespan, such as a clock.
- Property other than your main home*
For any additional properties you own, bought for personal or business use, you’ll need to pay tax on the profits you make when the property is sold. Buy to let properties, business premises, land and inherited properties all count. Read more about the ins and outs of buy to lets in our articles Is buy to let a good investment? and Should I own my Buy to Let property through a limited company?
*You can usually sell your main home without having to pay CGT. However, certain exceptions do apply. For example, you may have to pay Capital Gains Tax upon selling your main home if you have let part of it out for a period of time (having a lodger doesn’t count), you have used part of it exclusively for business purposes (having a home office usually doesn’t count), or if it is especially large (the grounds total over 5,000 square metres).
- Any shares, other than those held in a tax-efficient ISA (Individual Savings Account)
You will usually have to pay Capital Gains Tax if you make a profit from selling shares or investments. The main exceptions here are ISAs – learn more about how these work in our guide Everything you need to know about ISAs.
- Business assets
Anything you buy to use for business purposes is generally subject to CGT if you sell it on and make a profit. This might include physical assets like land, equipment or machinery, or it might include shares, registered trademarks, or the business itself.
How much Capital Gains Tax will I pay?
As mentioned, you only need to pay Capital Gains Tax on gains that exceed your yearly tax-free allowance, known as the Annual Exempt Amount, which in the 2022/23 tax year is £12,300.
For example, say you sell some shares and make a profit of £20,300. This is £8,000 over the Annual Exempt Amount, so you will owe CGT on £8,000.
You may be able to reduce the amount of tax you need to pay if you have made losses from selling other chargeable assets – these are called “allowance losses”. These can be losses from the same tax year, or even previous tax years if you have not used them before. You can claim up to four years after the end of the tax year that you disposed of the asset, or on any losses from before 5 April 1996. You can also sometimes claim a loss on an asset that you still own if it becomes worthless – this is called “negligible value”.
Reporting an allowance loss means that amount will be deducted from the gains you made in the current tax year.
Take the earlier example, where you owe CGT on £8,000 of your profits. Imagine that two years ago you sold a buy-to-let property for £5,000 less than you bought it for, and never claimed this loss on a tax return. If you claim the loss now, you’ll only owe CGT on £3,000 of your profits (£8,000 minus your £5,000 loss).
You can also carry forward some of a loss to future tax years if your profits have been reduced below the Annual Exempt Allowance. Let’s tweak the above example and say that you lost £10,000 selling the property, rather than £5,000. Reporting the loss would take your profits to £2,000 below the Allowance threshold, meaning you would not have to pay any CGT for the year, and that you could carry that remaining £2,000 loss to use in a future tax year.
If you’re married or in a civil partnership, it may be possible to reduce any Capital Gains Tax liability by making sure you use both your allowances effectively.
Mr Springett said: “In terms of reducing CGT exposure, married couples and those in civil partnerships can transfer assets to each other – known as an interspousal transfer – to make use of both sets of allowances, as well as shift a potential gain to whichever partner might be exposed to a lower tax band.”
How do I pay Capital Gains Tax?
You won’t get a bill for Capital Gains Tax – you need to work out if your gains exceed your yearly allowance, and then report them yourself to HMRC if they do. You will also need to report any allowance losses that you want to use.
For the sale (or otherwise disposing) of a residential property after 27 October 2021, the deadline to report the sale and pay tax on any chargeable gains is 60 days. For other assets, you can report the sale or disposing in a Self Assessment Tax Return, or by using the online Capital Gains Tax Service, at any point in the following tax year. Find out more about how to do this at GOV.uk.
Capital Gains Tax rules can be complicated, so you may want to seek professional help working out any potential liability. You can find a qualified chartered accountant in your local area using the Institute of Chartered Accountants in England and Wales’ (ICAEW) directory of chartered accountants.
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