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Capital gains tax: what it is, how it works & what to avoid

Updated 06 May 2022

5min read

Kate Morgan
Staff Writer

A guide to capital gains tax (CGT) and how to navigate it to your advantage.

capital gains tax explained

In this article we will cover:

  1. What is capital gains tax? 
  2. How does capital gains tax work? 
  3. Capital gains tax rates  
  4. Capital gains tax allowance 
  5. How to calculate capital gains tax 
  6. How to pay capital gains tax 
  7. When do you pay capital gains tax? 
  8. How to avoid capital gains tax 
  9. How to reduce capital gains tax 

What is capital gains tax? 

Many people may have seen the ‘Pay Capital Gains Tax’ penalty in popular board game Monopoly, but do you know exactly what capital gains tax (CGT) is? 

Capital gains tax is a form of government taxation relating to gains made on the value of assets (things that you own) held for more than one year.

This can include the sale of shares for example, or the sale of a business, inherited properties or second homes. It can apply to any valuables you might own over a certain value if you sell them at a profit. This also includes gains made on Cryptocurrency sales. 

How does capital gains tax work? 

Unlike income tax, CGT is not automatically deducted by the inland revenue and needs to be self-reported. There are so many different fiscal triggers, so it is important to be aware of what needs to be reported.

If you don’t provide accurate reports, you will pay a fine worth far more than the deduction would have been, should you fail to notify HMRC.  

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. Over the 2020/2021 tax year, the basic rate on residential property gains was 18% and 10% on all other assets.

The higher/additional rate of CGT in the same year was 28% on residential property and 20% on all other assets. This rate of CGT has remained the same for 2022. 

Capital gains tax allowance 

When considering your tax return, you’ll be pleased to know that there is a capital gains tax allowance. How much is the capital gains allowance? Well, it’s currently set at £12,300 for individuals, meaning that you can make £12,300 of profit on your assets before the applicable rates kick in.  

Should you have joint ownership of a taxable asset such as a second home, the allowance doubles to £24,600. For those who are married or in a civil partnership, assets can be exchanged between you.

However, be aware that if you do 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 that you owned the asset(s) together, rather than the date of transference.  

So, if you’re wondering how much capital gains tax you pay on property or when you sell a house, it’s zero on your main residence and, depending on your bracket, either 18% or 28%. 

How much capital gains tax on stock and shares depends again on your bracket, but any gains will be taxed at either 10% or 20%.

How to calculate capital gains tax 

Well, you do it manually with a pen, paper and calculator. However, if you have a large number of taxable assets this may take some time.

Alternatively, the government has published a Capital Gains Tax Calculator on the GOV.UK website. This page also lists out some of the deductions, reliefs and special circumstances that might be available, which we also cover below. 

The world of fiscal contributions is vastly complicated; getting it wrong can result in headaches, interest and fines. But getting it right can be financially rewarding.  

A financial adviser will be able to analyse your income and outgoings and consider any tax overlaps between CGT, stamp duty, VAT, inheritance and income tax, to guide you through your tax return. 

How to pay capital gains tax 

If you currently complete a tax return, then CGT can be reported through this. Otherwise, you can use the UK government’s real-time capital gains tax service to pay what you owe immediately. Find out the deadlines for these two ways of paying capital gains tax in the next section. 

When do you pay capital gains tax? 

Anytime you sell a taxable asset and receive more for it than you paid, CGT will apply (there are a few exceptions such as non-business use cars). 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 official deadline for tax returns is 31st January. However, the deadline has actually been extended for this year, meaning you won’t receive a fine if you submit your return before 28th February 2022. 

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 31st December in the year after your gains have been made. 

You must also pay CGT on any cryptocurrency gains that are realised. That is, if you use your gains to buy more cryptocurrency, or you withdraw/convert it to pound sterling, CGT will apply. 

How to avoid capital gains tax 

The short answer is that if you owe CGT contributions 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 even 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 saving tax on capital gains. However, it’s important to obtain expert guidance from a financial adviser to help you understand all overlapping taxes and opportunities for tax relief and make sure you pay what you owe. 

  1. Transfer assets to your partner. This means that you both take advantage of your full pre-tax allowance of £12,300 

  1. 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. 

  1. Use your CGT allowance. CGT allowances can’t be rolled over into the following tax year, so it really is a case of use it or lose it.  

  2. Principle private residence (PPR). PPR allows you to sell a residential property that is or was your main home without paying CGT IF you have lived in that home at any time in the last nine months. This relief primarily affects couples going through divorce, whereby one party may leave the family home to live elsewhere before selling the family home which is now technically a second home. 

  3. Be aware of your wasted assets. Wasted assets are those which have a life of under 50 years, such as antique clocks, vintage cars or caravans. 

  1. Invest your money in EIS or ISAs. Both of which provide a tax-free home for your savings. 

  1. Give to charity. If you give shares, land or property to charity then income and CGT relief is available. 

  1. Contribute to a pension. This may alter your CGT bracket meaning you pay less. 

  1. 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. 

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About the author
Kate has written for leading publications and blue chip companies over the last 20 years.