Don't understand what capital gains tax (CGT) is?
In this guide, we'll reveal what it is, how much your CGT allowance is and how to reduce your tax bill.
In this article, we will cover:
- What is capital gains tax?
- How does capital gains tax work?
- Capital gains tax rates
- Capital gains tax allowance
- How to calculate capital gains tax
- How to pay capital gains tax
- When do you pay capital gains tax?
- How to avoid capital gains tax
- How to reduce capital gains tax
What is capital gains tax?
You may have heard of capital gains tax (CGT), but do you know what it is and how it works?
Capital gains tax is a tax on gains made on the value of your assets (things that you own).
This can include the sale of shares, for example, or the sale of business assets or second homes.
How does capital gains tax work?
Unlike income tax, CGT is not automatically deducted by HMRC, so you need to report it.
There are many different fiscal triggers, so it is important to be aware of what needs to be reported.
Capital gains tax rates
CGT rates differ from income tax rates and are in two broad brackets: basic rate payers and higher/additional rate payers.
In the 2023/24 tax year, the basic rate on residential property gains was 18% and 10% on all other assets.
Capital gains tax allowance
When doing your tax return, you’ll be pleased to know that you have a capital gains tax allowance.
It’s £6,000 for individuals (£3,000 for trusts) in the 2023/24 tax year, meaning you can make £6,000 of profit on your assets before the applicable rates kick in. From April 2024, the CGT allowance will be cut from £6,000 to £3,000.
Should you have joint ownership of a taxable asset such as a second home, the allowance doubles to £12,000. For those who are married or in a civil partnership, assets can be exchanged between you.
However, if you transfer assets to a partner and make a gain from this at a later date, the CGT that you pay will be based on the total time you owned the asset(s) together rather than the date of transference.
You usually don't pay capital gains tax when you sell your main home but will pay it when you sell a second property or main home if you've let it out, used it for business, or it's very large. The CGT rate would either be 18% or 28%, depending on your tax bracket.
How to calculate capital gains tax
While you can work out if you need to pay capital gains tax using these easy steps, if you have a large number of taxable assets, this may take some time.
Alternatively, you can use the capital gains tax calculator on the gov.uk website.
This page also lists some of the deductions, reliefs and special circumstances to consider, which we also cover below.
Filling out tax forms wrong can result in headaches, interest and fines, but getting it right can be financially rewarding.
An accountant will be able to analyse your income and outgoings, as well as flag any tax relief when helping you with your tax return.
How to pay capital gains tax
If you currently complete a self-assessment tax return, then CGT can be reported through this.
Otherwise, you can use the UK government’s capital gains tax service to pay what you owe immediately.
When do you pay capital gains tax?
Anytime you sell a taxable asset and receive more for it than you paid, CGT will apply (although there are a few exceptions).
CGT on second homes (or non-primary residential property) must be declared within 60 days of the sale and any gain being made.
If you’re including CGT within your annual tax return, the online deadline is 31 January, while the deadline for paper tax returns is 31 October.
The exception to this is the sale of residential property – this should be reported to the government within 60 days.
If you’re using the HMRC real-time capital gains tax service to pay, then this should be submitted by 31 December in the year after your gains have been made. You must also pay CGT on any cryptocurrency gains that are realised.
How to avoid capital gains tax
The short answer is that if you owe CGT, then you can’t and shouldn’t avoid paying them.
Not declaring or paying what you owe is an offence that could land you with a fine, possibly leaving you to pay more than you originally owed in interest.
However, there are a number of reliefs and conditions which, if you receive the right financial advice, may mean the amount of CGT you pay is lower.
How to reduce capital gains tax
Here are a few things to consider when it comes to reducing your capital gains tax bill.
It’s important to obtain expert guidance to help you understand your tax relief opportunities and make sure you pay what you owe.
Transfer assets to your partner. This means that you both take advantage of your full pre-tax allowance of £6,000.
A loss can be a gain. Make sure any losses are declared to HMRC as these will offset your gains to give a revised contribution amount.
Use your CGT allowance. CGT allowances can’t be rolled over into the following tax year, so it really is a case of using it or losing it.
See if you qualify for principle private residence (PPR). PPR allows you to sell a residential property that is or was your main home without paying CGT, provided certain conditions are met.
Be aware of your wasted assets, which are those that have a life of under 50 years, such as antique clocks, vintage cars or caravans.
Invest your money in EIS or ISAs, which both provide a tax-free home for your savings.
Give to charity. If you give shares, land or property to charity then, income and CGT relief is available.
Contribute to a pension. This may alter your CGT bracket, meaning you pay less.
Be organised. Knowing what your taxable assets are (and aren’t), what your allowance is and how and when to pay CGT can all affect how much you end up contributing.
Where both spouses or civil partners have used their annual CGT allowance, ensure assets are sold by the individual who pays the lowest marginal rate of tax.
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