Capital Gains Tax: Everything You Need To Know

Capital gains tax, an integral component of the modern tax system, plays a crucial role in determining the financial obligations of individuals and businesses when they sell or transfer certain assets. While often a topic of intense debate and scrutiny, comprehending the basics of capital gains tax is essential for anyone seeking to navigate the intricacies of investment, financial planning, and taxation. 

In this article, we will delve into the fundamental aspects of capital gains tax, exploring its definition, calculation methods, and the potential impact it can have on individuals, businesses, and the overall economy. By gaining a clear understanding of this complex tax, readers will be equipped to make informed decisions and optimise their financial strategies in a world shaped by ever-evolving tax policies and regulations.

What Is Capital Gains Tax (CGT)?

Capital gains tax is a tax that may be applicable when you sell, transfer, gift, or exchange all or part of an asset. It is paid by both UK residents and non-UK residents on UK assets such as property and investments. Additionally, UK residents may also be liable for CGT when disposing of an overseas asset.

What Assets Are Subject To CGT?

• Shares
• Funds
• Investment trusts
• ETFs
• Land
• Investment and second properties
• Other possessions, such as art, valued at least £6,000

What Assets Are Exempt From CGT?

• The family home*
• Most personal possessions
• Possessions that depreciate
• UK government bonds (gilts)
• ISA investments
• Pension investments
• Venture capital trusts (VCTs)
• Enterprise investment schemes (EIS)

*In most cases, your primary residence is exempt from CGT. However, there are exceptions, such as if you rent out part of your property or if your property is situated on land larger than one acre.

£14.3 Billion CGT was paid in 2020/2021. Your annual CGT allowance for 2023/24 is £6,000.

Can Capital Gains Tax (CGT) Be Eliminated?

Each tax year, you have a personal CGT allowance. For this year, it’s £6,000, which will reduce to £3,000 in the next tax year for individuals (or up to £3,000 for most trustees, reducing to £1,500 the following tax year).

This means that you can realise gains up to £6,000 (after deducting any losses and applying applicable reliefs) and pay no CGT. However, if you don’t utilise your allowance within a tax year, it cannot be carried forward like some other tax allowances. It will be lost forever.

There are a few circumstances that can reduce the amount of CGT you’ll need to pay:

Expenditure and Costs: Sometimes, the money spent on increasing the value of an asset can be deducted. For example, in the case of property, the cost of improvements such as an extension can be offset against CGT. However, the cost of maintenance, like redecorating, cannot be offset. In the case of shares, you can reduce the gain by deducting the costs of buying and selling the shares.

Losses

If you sell an asset at a loss, the loss can be offset against any gains made in the same tax year. If there are more losses than gains, the excess losses can be carried forward to offset against future gains in later tax years. It is important to register the loss with HMRC to utilise this provision.

Business Assets

Business assets can receive more favourable treatment through Business Asset Disposal Relief, which was formerly known as entrepreneur’s relief. These assets typically involve a shareholding or interest in the company or firm you work for. Generally, to qualify for this relief, you must hold at least 5% of the shares and voting rights. Additionally, you should have an entitlement to at least 5% of the distributable profits (and distributable assets on wind up), or of the proceeds if the company is sold. Business asset disposal reduces the CGT rate to 10% for the first £1 million of gains in your lifetime. CGT relief can also apply when disposing of a property that was used as a business asset.

How Much Will You Pay In Capital Gains Tax (CGT)?

To determine if you will be affected by CGT and calculate the amount you’ll need to pay, follow these three steps:

Step 1: Calculate Your Gain

Calculate the difference between the sale proceeds and the initial cost of the asset. This will give you the total gains in a tax year. For example, if you sold shares worth £56,300 that you initially purchased for £30,000 (assuming no transaction costs), your total gain would be £26,300.

Step 2: Deduct Your Allowance

Subtract your annual CGT allowance from the total gains. For instance, if your total gain is £26,300 and your CGT allowance is £6,000, the amount to be taxed would be £20,300. This assumes that you haven’t incurred losses on other investments.

Step 3: Calculate The Tax Amount

CGT is typically charged at either 10% or 20%, depending on your taxable income in the specific tax year. Your gain is added to all other taxable income in that tax year to determine the applicable tax rate. Gains from residential property are taxed at 18% and 28%, depending on other taxable income.

If your gain falls into two tax bands, moving from the basic rate to the higher rate, you will pay CGT at 10% (or 18% in some cases) on the amount within the basic-rate band, and at 20% (or 28% in some cases) on the amount within the higher-rate band.

Scottish taxpayers should refer to the UK tax bands for calculating the amount of CGT due.

When is capital gains tax (CGT) paid?

The timing of when you sell, transfer, gift, or exchange assets can have a significant impact on when CGT must be paid. 

Here are the key points to consider:

Declaration And Payment

If your gains exceed £6,000, you must declare them on your self-assessment tax return for the same tax year in which you made the gains. The CGT must be settled no later than January 31st of the following tax year. For example, if you made gains on April 5th, 2023, you must pay the CGT by the end of January 2024. However, if you made the gains on April 6th, 2023, you have until the end of January 2025 to pay the CGT. This flexibility in timing can offer tax planning opportunities by deferring tax liabilities.

CGT On UK Residential Properties

For the sale of UK residential properties, CGT liabilities need to be paid within 60 days of the completion date. This becomes especially important to consider if you anticipate making significant gains from property transactions.

It’s crucial to stay aware of the deadlines and ensure timely payment of CGT to avoid any penalties or interest charges.

Capital Gains Tax (CGT) And Investments

Calculating gains on shares or funds is usually straightforward. You subtract the initial cost from the proceeds to determine the gain. However, what happens when you’ve added to your original holdings? Let’s consider an example:

Initial purchase: You buy 1,000 shares at a price of £1.20, totaling £1,200.

Additional purchase: A year later, you buy another 3,000 shares at a price of £1.20, costing you £3,600.

Total shares: 4,000

Total cost: £4,800

Average initial cost per share: £4,800/4,000 = £1.20

Let’s assume you decide to sell 1,500 shares at £1.25, resulting in total proceeds of £1,875.

To calculate the gain:

Average initial cost: 1,500 shares x £1.20 = £1,800

Gain: £1,875 – £1,800 = £75

Determining which shares are being sold first is crucial to determine the base cost. Here’s the order of disposal for shares:

Same-day Rule

Shares bought on the same day as they’re sold. The base cost is the actual cost of these shares.

Bed & Breakfasting Rule

Shares bought or acquired in the 30 days following the sale. The base cost is the actual cost of the repurchased shares.

Section 104 Holding Or Pooled Shares

All other shares. The base cost for CGT purposes is the average base cost across all the holdings. You’ll need to calculate the average cost of your shares and deduct it from the disposal proceeds to determine the gain.

For share reorganisations involving rights and bonus issues or shares issued during a company takeover, they are not treated as acquisitions. You can refer to HMRC’s helpsheet ‘285’ (HS285) for further information on share reorganisations, company takeovers, and CGT.

Expenses

When calculating your gain, you can deduct certain expenses associated with buying and selling shares. These expenses include stockbroking fees, as well as any Stamp Duty or Stamp Duty Reserve Tax (SDRT) paid when purchasing the shares.

Dividends

Dividends, which are considered income, are not subject to CGT. However, they may be liable for income tax if held outside of an ISA or pension. If you choose to reinvest dividends, the new shares should be treated the same way as any other share purchase.

Funds And Collectives

For accumulation units, the income is automatically reinvested rather than paid out. This notional income is typically subject to income tax, unless held within an ISA or pension. CGT does not apply to this notional income.

If you hold accumulation units within one of our Nexus funds, we will provide you with a consolidated tax certificate after the end of the tax year, which will show how much income has been reinvested.

To calculate any CGT that may be due when selling the fund, you need to subtract the value of the notional income from the sale proceeds of the fund.

Exceptions to paying CGT

In certain situations, you usually do not need to pay CGT:

• When gifting shares or funds to your spouse or a registered charity.
• When selling shares or funds held in an ISA or pension.
• When selling the first £100,000 worth of “Employee Shareholder” shares or shares in employer Share Incentive Plans (SIPs).
• When contributing shares from an employer Save As You Earn (SAYE) scheme to an ISA within 90 days of acquiring the shares (CGT may apply if contributed to a pension).
• When selling UK government gilts, Premium Bonds, or qualifying corporate bonds.

CGT And Property

Understanding capital gains tax (CGT) in relation to property can be quite complex.

Your Family Home

In most cases, when you sell your family home, there is no CGT to pay. However, there are exceptions to this rule. If your property is on more than one acre of land or has been used for rental or business purposes, CGT may be applicable when sold.

Investment, Buy-To-Let, And Second Properties

CGT is applicable when selling or transferring investment properties, buy-to-let properties, or second homes. The rate of CGT can be either 18% or 28%, depending on your other taxable income in that specific year.

Managing and reducing CGT on a property is not as straightforward as it is with shares or funds. It is generally not possible to sell a portion of a property each year to utilise the CGT allowance. However, you can offset the costs associated with buying, selling, or renovating the property against the gain.

Relief On Properties

There are certain circumstances where you may be eligible for CGT relief on properties. These include:

• The property was a business asset. 
• You rented out a portion of your home. 
• The property was occupied by a dependent relative. HMRC Helpsheet 283 (HS283) provides further information on this relief.

It is advisable to consult official resources and seek professional advice to fully understand and navigate the complexities of CGT in relation to property transactions.

How To Minimise CGT

There are several steps you can take to minimise CGT (capital gains tax):

Utilise the annual capital gains tax allowance: Currently set at £6,000, this allowance allows individuals to make gains of up to £6,000 per year without incurring a CGT liability. Married couples or civil partners can effectively double this allowance to £12,000 by jointly utilising their allowances.

Offset losses against gains: If you have investments that were sold at a loss, you can offset these losses against any gains you have made. If your losses exceed your gains, you can carry forward the remaining losses to offset against future gains.

Time your sales for lower tax rates: CGT is based on your income tax rate. If you anticipate a lower tax rate in the future, such as during retirement, you may consider delaying the sale of investments until then to reduce your CGT liability.

Consider transferring assets to your spouse: Married couples or civil partners can transfer investments between each other without triggering a CGT liability. This can be advantageous before selling an investment or if one partner has a lower tax rate than the other.

Reduce taxable income: Lowering your taxable income can reduce the amount of CGT you have to pay. One effective way to achieve this is by maximising the use of tax shelters such as an ISA, where investment income is free from UK tax. Additionally, making pension contributions can reduce your taxable income and potentially lower your CGT rate.

Gift assets to charity: Donating property, land, or shares to charity can be highly tax-efficient and can save you CGT as well as other taxes. You can directly gift the asset without incurring any tax consequences, or you can sell the asset and gift the cash, which may have some tax implications. However, Gift Aid may be available on the value of the money gifted, providing further tax benefits.

It is important to consult with a tax professional or financial advisor to understand the specific implications and benefits of these strategies in your individual circumstances.

Getting Expert Advice On Capital Gains Tax

If you’re going through changes in your circumstances, employment status, or income tax situation, or if you’ve received an inheritance and need guidance, we’re here to assist you. Making financial decisions can be daunting, especially when you’re short on time or lack confidence.

Our team of highly qualified financial planners is ready to help. They can provide advice on financial products and tax planning strategies to optimise your situation. While they are not tax specialists, they can collaborate with accountants or tax specialists to ensure accurate calculations of existing or future CGT liabilities.

Give us a call, and we’ll be happy to assess whether financial advice can benefit you. We only recommend meeting with a financial adviser if it aligns with your needs. If we determine that our services can assist you, we’ll schedule a complimentary initial consultation with an adviser. There’s no obligation to take advice, but if you choose to do so, we will discuss the associated charges with you openly and transparently.

Disclaimer

The purpose of this guide is to provide you with valuable information about capital gains tax. However, please note that it does not constitute personal advice. Its intention is to highlight areas that you may wish to discuss with an adviser or research further. When we refer to married couples, this also includes registered civil partnerships.

It is important not to rely solely on this guide when making decisions. If you require additional guidance, HMRC’s capital gains tax (CGT) help notes and helpline can provide further assistance. If you need personalised recommendations or are uncertain about whether a specific investment is suitable for you, we recommend seeking advice.

This guide is accurate as of April 5, 2023, and all figures and tax information pertain to the 2023/24 tax year and apply to UK residents and domiciles. However, tax rules are subject to change, and the benefits mentioned in this guide depend on your individual circumstances.