Capital gains tax (CGT) is the tax you pay when you sell, or ‘dispose of’, an asset for a profit – or gain. You used to be able to make thousands of pounds per tax year in capital gains from selling things you owned before paying CGT, and while some assets are free from CGT (more on this later) there have been a series of changes in recent years that seriously curtail the amount of profit – or gain – you can make before you need to start paying tax.
What is capital gains tax?
Capital gains tax (CGT) was first introduced in the UK in 1965 and simply put it is a tax on the profit you make when you ‘dispose of’ certain items. A capital gain is, broadly speaking, the difference between the price you paid for something and the price you sell it for. The tax you pay is on the gain only – not the total sale price. For example, if you were to buy a piece of art for £5,000 and later sold it for £20,000, you’ve made a £15,000 gain on the asset and you may need to pay capital gains tax on the £15,000.
As with many personal taxes, the Government gives you an annual allowance – this is the threshold at which your tax liability will kick-in. In the case of capital gains tax, each person has a tax-free allowance – the amount of gain they can make on the sale of assets in a tax year before they pay CGT. The capital gains tax-free allowance for the current tax year, which ends on 5th April 2023, is £12,300. So, if we return to our piece of art example and assuming you’ve disposed of no other assets in the current tax year you would need to pay CGT on £2,700 – the capital gain (£15,000) less the CGT allowance (£12,300).
It’s important to note that for CGT purposes the disposal of an asset includes selling it, giving it away as a gift (although there are special rules for CGT on gifts to your spouse or civil partner or charity), transferring it to someone else, swapping it for something else or getting compensation for it (such as an insurance pay out if it’s been lost or stolen).
What do you pay capital gains tax on?
Knowing when you do and don’t need to pay capital gains tax will help you keep on top of your allowance, how much you may have used and therefore how much you may need to pay in your tax return.
Some assets are exempt from capital gains tax, such as assets held in an ISA, Lifetime ISA or Junior ISA, and gifts to UK registered charities. You will usually need to pay CGT when you sell, or dispose of:
- most personal possessions worth over £6,000: this includes items such as jewellery, paintings, antiques, collectibles (such as stamps, coins or matching vases), but does not include your car
- property that is not your main home: for example, a buy-to-let property or a holiday home
- your main home if you’ve let part of it out (this does not include having a lodger), used it for business or if it’s a very large property
- shares or other investments that are not held in a tax wrapper (such as a stocks and shares ISA, Lifetime ISA, Junior ISA or pension)
- business assets: this could include land or buildings, or equipment.
It’s worth bearing in mind that there can be some exceptions for assets that it considers to be ‘wasting assets’. A wasting asset is one that is defined as having an expected life of 50 years or less. Some examples of wasting assets are wines (although fine wines are not included), boats, caravans and antique clocks.
Changes to capital gains tax rates
The amount, or rate, of capital gains tax you will need to pay will depend on your income level and the asset – CGT rates are different for residential property than they are for other assets.
For people who pay income tax at the higher or additional rate, your capital gains tax rate is 28% for gains from residential property, and 20% on gains from other assets.
If you’re a basic rate taxpayer, then there’s a little more to calculate:
- You need to know your taxable income. This is your income, minus the personal allowance and any other income tax reliefs you’re entitled to.
- You need to know your total taxable gains after the CGT annual allowance (currently £12,300 for the 2022/23 tax year)
- Add your taxable income to your total taxable gain after the annual allowance.
If this figure is still within the basic rate of income tax band, currently £12,571 – £50,270, then you’ll pay 18% for gains from residential property and 10% on gains from other assets. Any gains above £50,270 are taxable at 28% or 20%.
Calculating how much capital gains tax you may need to pay can be complicated, there are online tools and guides to help. Nutmeg’s capital gains tax calculator can help you estimate what you owe.
Reduction in the annual exempt amount
In November 2022, Jeremy Hunt delivered his Autumn Statement and announced several changes to taxation in the UK – including a reduction to the annual capital gains tax allowance. The threshold for paying CGT will more than halve in the next tax year – reducing from its current level of £12,300 down to £6,000 for the 2023/24 tax year and will then halve again to £3,000 in the 2024/25 tax year.
The reduction of the CGT annual allowance could mean that people that have never been liable for paying CGT in the past may now be required to pay CGT when selling assets or on investment returns for money held outside a tax wrapper, for example in a general investment account.
To avoid being caught out, it may be time to review whether you are making the most of your ISA and Junior ISA allowances or whether some of your funds could be put to better use in a personal pension. Our experienced wealth managers can help discuss your options or answer any questions you may have around the reduction in the capital gains tax allowance. Book a free call with one of our wealth managers at a time that suits you.
Deadline for paying capital gains tax
Depending on the type of asset, there are different rules about when you need to report your CGT liability and pay any tax owed. If you make gains on the sale of shares or other assets, you can use your self-assessment tax form to report the gain and pay what is due up until 31st January of the year following your tax return period, so 31st January 2024 for the 2022/23 tax year.
If you do not have to complete a self-assessment tax return, there is a service on the Gov.uk website to report capital gains in real time. You must report by 31st December in the tax year after you made your gain and pay by 31st January of the following year
Strategies for minimising capital gains tax liability
One of the best ways to minimise your capital gains tax liability is to maximise your wrapper allowances. Every tax year, adults in the UK have an ISA allowance – currently £20,000. This means that you can put £20,000 into a cash ISA, stocks and shares ISA or Innovative Finance ISA or a combination of the three. Any income (interest, dividends or investment returns) are exempt from capital gains tax.
As the CGT annual allowance is reducing – you may want to consider moving any money from a general investment account into a stocks and shares ISA as early in the new tax year as possible. This can help to ensure that more of your investments – and therefore potential returns – are tax wrapped.
In addition to ISAs, money invested in a personal pension is also exempt from capital gains tax, although withdrawals from your pension are subject to income tax. In his Spring Budget, Chancellor Jeremy Hunt, announced that from April 6th 2023 the annual allowance for personal pension contributions each year will increase from £40,000 to £60,000. So, for those who have money they don’t need to access until they retire, increasing pension contributions may be worthwhile.
There can be some additional tax reliefs or allowances that can help you minimise your capital gains liability and you may be able to offset capital gains losses from a previous year against this year’s gains. So, if you’re selling or otherwise disposing of an asset and you’re not sure if you will need to pay CGT, it can be worthwhile speaking to an expert who will be able to help you.
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Tax treatments depend on individual circumstances and may be subject to change in the future. This is general information on tax for information purposes and is not tax advice. . Each taxpayer is responsible for their own tax affairs.
*For persons tax resident in Scotland the income tax personal tax allowances and income tax rates are different. However the CGT calculation rate limits above should still apply. https://www.gov.uk/scottish-income-tax