Capital Gains Tax – your guide

Capital Gains Tax

Why is everyone talking about Capital Gains Tax?

Capital Gains tax, or CGT has been in the news a lot recently, as there is much speculation that this will be the first place that the government will go to try to fund some of the tax deficit created by the billions which have been spent on keeping the economy going through the coronavirus pandemic.

Rishi Sunak in July asked the Office of Tax Simplification (OTS) to look at ‘simplifying’ Capital Gains Tax, and their report was published last week. More on this to follow.

But first…

So, what is Capital Gains Tax?

Capital Gains Tax is a tax which is levied on any profit or ‘gain’ made when you sell anything (an ‘asset’) which has increased in value.  So, essentially it’s the difference between what you paid for it and what you sold it for which is taxed.

What do you pay Capital Gains Tax on?

It might be easier to ask ‘what don’t you pay Capital Gains Tax on?’

  • You don’t pay CGT on the sale of your main home (PPR – Principal Private Residence), or the sale of your car
  • Nor do you usually pay CGT

Any other personal possessions worth more than £6,000 are however liable for CGT.

  • This includes your main home if you’ve let it out (or indeed if you have used it for business, so be very careful about what you claim), or if the property and grounds are more than 5000 square metres.
  • You also pay a form of CGT on any gain made when you sell any business assets, how much will depend on whether you qualify for Business Asset Disposal Relief (formally known as Entrepreneurs Relief).
  • And of course any shares which you sell which are not in an ISA, PEP or SIP

However, you only pay CGT on any gains over and above your annual tax-free allowance, which is currently £12,300 per person. More on this below.

Who doesn’t pay Capital Gains Tax?

  • Lottery winners and gamblers – there is no tax on any gain from your winnings. At the moment
  • Beneficiaries of wills – see our guide to Inheritance Tax to understand more about what is paid, by whom, when and how when you are the beneficiary of someone’s estate after they die. You only need to consider Capital Gains if you sell on an asset after you have inherited it.
  • Gifts to spouses and charity – there are different rules around gifting to charity, and to your spouse or civil partner. But be careful of rules around separation or if products are sold on.

What if I live abroad?

This is something we are frequently asked – if I move abroad will I not have to pay Capital Gains Tax?

And the answer? Well, it depends… If you are a UK resident, but not domiciled (living in the UK) then there are special rules to consider and you may be able to claim the remittance basis.

However, if your gain relates to land or property, you will still have to pay CGT, and beware, the tax has to be paid within 30 days of completion of the sale.

There are additional rules and timings to consider if you are selling other assets while living abroad, as any exemption becomes null and void if you return to the UK within five years of leaving.

How much is Capital Gains Tax?

How much you pay depends on whether your gain is on the sale of residential property or other assets, and whether you are a higher rate or basic rate tax payer:

If you are a higher (or additional) rate income tax payer you will pay:

  • 28% CGT on any gains from residential property
  • 20% on gains from other chargeable assets

If you are a basic rate tax payer you will pay the following rates:

  • 18% CGT on any gains from residential property
  • 10% on gains from other chargeable assets

If you are selling a business:

  • And you qualify for Business Assets Disposal Relief (Previously known as Entrepreneur’s relief) you will pay 10% tax on any gain up to £1 million

What Tax Free Allowances are there?

Currently there is an annual personal allowance of £12,300 of gain which you can make before you are required to pay CGT.

If any asset is jointly owned, then you can both use your personal allowances before any tax is due.

Before you calculate your gain, you should deduct your annual allowance as well as any allowable losses and any other allowances, for example lettings relief if the asset is a property. 

For more on this see our separate article on calculating gains on property sales. 

If you are a basic rate tax payer and your income is less than your annual personal allowance, you may also deduct the balance of your personal allowance to utilise this first.

How do you report and pay Capital Gains Tax?

There are three different ways to report and pay Capital Gains Tax:

  • For the sale of UK property you should use the Capital Gains Tax on UK Property service within 30 days of selling your property. Or,
  • By using the real time CGT service to report immediately. Or,
  • Annually in your Self Assessment tax return.

If my gain is less than the annual allowance and I have no tax to pay, do I need to do anything?

Only if the amount you sold your asset for is more than four times the annual allowance (so property for example) AND you are registered for Self Assessment.

There may be penalties and interest to pay if you report late or miss a payment deadline, and must keep records relating to a gain for a minimum of one year after the filing deadline, or longer if you have filed late.

For HMRC’s full guidance on Capital Gains Tax, please see their page on the subject:

As ever, if you have any questions, or would like the IN Team to calculate your gain or potential gain, then please don’t hesitate to CONTACT US

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