Your guide to Capital Gains Tax
Capital Gains Tax (CGT) is complicated. That means some people end up paying it unnecessarily, while others get caught out and face fines for failing to properly declare their gains.
Here are some FAQs about CGT and how financial planning can help.
What is Capital Gains Tax?
CGT is a tax that is charged when you sell (or even give away) something – such as an investment – that has increased in value. The tax isn’t charged on the total sale price; rather, it’s levied on the profits or gains that you made during your ownership of that asset.
So, if you buy an antique ring for £10,000 and sell it for £15,000, your capital gain is £5,000.
What is CGT charged on?
The sale proceeds of almost any personal possession can be subject to CGT, from shares and investments to buy-to-let properties, holiday homes, jewellery, fine wine, paintings, coins and stamps.
There are, however, a number of exceptions. These include:
- Shares or investments held within a pension or an ISA – these wrappers shelter their contents from tax
- Your primary home
- Your car
- Assets you leave to charity
Do I have a tax-free allowance for CGT?
Yes. In the current tax year (2021/22) you can enjoy £12,300 of gains before you need to pay CGT. You might see this referred to as your annual exempt amount. This allowance has been frozen by the government until 2026.
How much CGT will I have to pay?
This depends on your income.
If you pay the basic rate of tax and the gains you have made are still within the basic-rate band, you’ll pay 10% CGT, unless you’re selling residential property, in which case the rate rises to 18%.
If you pay higher-rate tax, or your gains combined with your income bring you into the higher rate, you’ll pay 20% for most assets and 28% for residential property.
How can I cut my CGT bill?
There are a number of ways to legally reduce the amount of CGT that you pay. However, what works best for you will depend on your circumstances, and it may also need to be managed over time – which is why financial advice is so important.
Give assets to your spouse or partner. Most transfers of capital between spouses or civil partners are free from CGT. By transferring assets to them, you’ll be able to use both of your annual allowances.
Increase your pension contributions. The amount of CGT you pay is linked to your rate of Income Tax. By increasing your pension contributions, you can reduce your income for tax purposes and consequentially the rate of CGT that you are charged.
Use your annual allowance. You can’t carry forward any unused allowance from the previous year. However, by carefully planning ahead and selling gains gradually over a number of years, you can ensure you keep them within the annual allowance.
Maintain your assets. If you make improvements to a holiday home or restore a valuable painting, you can deduct those costs for tax purposes.
I’ve heard about ‘bed and ISA’. What does that mean?
This is the process of selling up some investments and repurchasing them within a tax-efficient ISA wrapper.
This is a great way of using up your ISA allowance and sheltering the investments from CGT. It can also be a practical option if you need to sell gains up to the CGT annual allowance but don’t actually want to sell the investment.
What happens if I make a loss on an asset?
Of course, assets don’t always go up in value.
If you make a profit when selling one item and a loss when selling another, you can deduct the loss from your gain when calculating how much tax you need to pay. You are also able to carry forward any losses that haven’t been used to offset gains for up to four years.
Even if you don’t owe any CGT, it’s still a good idea to declare any losses on your tax return. This will make it less of a headache if you want to offset gains against them in future years.
What would happen if I sold my business?
You may be able to qualify for Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) if you are a sole trader or business partner and you’ve owned the business for at least two years. The relief reduces the rate of CGT on disposals of certain business assets from 20% to 10%.
How do I declare capital gains?
When you sell assets, if you have made gains of more than £12,300, you must declare it to HMRC.
How and when you do this depends on the asset or assets you sold.
If you sell a property and it completed after 27 October 2021, you have just 60 days to report your gain and pay the tax due. To do this, you need to set up a Capital Gains Tax on Property account on the government website.
For other gains, you can report and pay the tax straight away using the real-time service on the government website, or you can report it in a self-assessment tax return in the tax year after you sold the assets.
HMRC will tell you how much CGT you owe, how to pay it and when the deadline is.
Need help understanding CGT? Get in touch.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.