Capital Gains Tax Advice - What Is It & Who Needs to Pay It
If you've ever sold an asset, such as property, stocks, or valuable possessions, and made a profit, you may have to consider Capital Gains Tax (CGT). CGT is a tax on the profit you make when selling certain assets, and it's essential to understand how it works and whether it applies to you as a UK taxpayer.
In this blog, we will explore what Capital Gains Tax is, who needs to pay it and provide some essential advice to help you navigate these tax obligations.
What is Capital Gains Tax?
Capital Gains Tax is a tax levied on the gains you make when disposing of various assets. These assets include:
Property: This includes selling a property that is not your primary residence, like a second home or a buy-to-let property. Usually, you do not need to pay CGT on your primary home but if you haven't lived there for all the years you've owned it, you may have to.
Shares: Selling shares in a company, whether they are listed on the stock exchange or unlisted. This does not include Individual Savings Accounts (ISAs) or Personal Equity Plans (PEPs).
Personal Possessions: Valuable items like art, antiques, and jewellery that have a value exceeding £6,000
Business Assets: If you're a business owner, CGT may apply when you sell or dispose of business assets.
The tax is calculated based on the difference between the asset's selling price (or market value) and its original purchase price, known as the 'capital gain.' It's important to note that CGT is only payable on the gain portion, not the entire sale proceeds.
Who needs to pay Capital Gains Tax?
All individuals in the UK have an annual tax-free allowance, and you only need to pay CGT on total gains above this amount. In the 2023/2024 tax year, the Capital Gains Tax allowance is £6,000.
If you are married, have a partner or own assets with another person, you can combine your exemptions, potentially doubling the tax-free gains. However, you cannot carry forward any unused allowances from one year to the next.
It is also important to note that your CGT allowance is separate from your Personal Allowance, which is your tax-free allowance for income, such as salary or rental income.
You also do not need to pay CGT on assets including:
- Gifts to your spouse, civil partner or a charity
- Winnings, such as the lottery or pools
- UK government bonds
If your permanent residence is not in the UK, but you sell property here, you will still need to pay CGT. However, this usually doesn't apply to other assets you dispose of in the UK.
The rate of CGT you pay depends on your total taxable income for the tax year. As of 2023/2024, the CGT rates for higher or additional rate taxpayers are 28% for gains from residential property and 20% on other assets. If you are a basic rate taxpayer, CGT on any gains falling within that basic rate Income Tax band is 18% for residential property and 10% on other assets.
Using your losses to offset gains
If you make a loss when selling your assets, you can deduct this amount from the gains made in that year. You are also allowed to deduct unused losses from previous tax years. These losses can be claimed via your Self-Assessment tax return.
However, you cannot deduct losses when selling to a family member or other people HMRC deems 'connected'. These include business partners, civil partners or a company you control. The exception is if you use the loss to offset a gain from the same person.
Advice for managing your Capital Gains Tax obligations
If you need to pay CGT, make sure you maintain accurate records of all the transactions. These records should include the original purchase cost, additional expenses (e.g., legal fees, stamp duty), and the selling price. Good records will help you calculate the correct tax liability. If you have multiple assets, consider your CGT liability and plan your disposals strategically over a few years to maximise your annual exemptions and reduce the overall tax burden.
Capital Gains Tax can be complex, especially when dealing with multiple assets or unique circumstances. At Keith Graham, our experienced chartered accountants can advise you and help you keep CGT to a minimum. Please get in contact with our team if you'd like to find out more.