Capital Gains Tax.
Learn what capital gains tax (CGT) is, how it works and whether you might be affected by upcoming changes to the capital gains tax allowance.
What is capital gains tax?
CGT is a tax that may be charged when you sell (or get rid of) an asset that has risen in value since you have owned it.
This could include investments likes funds or shares as well as valuable artworks, antiques or jewellery and sometimes even property.
It is important to note that the CGT isn’t charged on the total value of the asset you have sold, it’s just charged on the gain that you have made.
The capital gains tax allowance
You don’t need to pay tax on all your gains. Each year you have a capital gains allowance and it’s only when you go over this allowance that CGT becomes payable.
In the current tax year (2023/24), the CGT allowance is £6,000.
Changes to the capital gains tax allowance
In his latest 2022 Autumn Statement, the UK Chancellor announced significant reductions to the capital gains tax allowance.
- In April 2023 the CGT allowance was cut from its current level of £12,300 to £6,000.
- This will be followed by a further reduction to £3,000 in the 2024/25 tax year.
When is CGT charged?
Capital gains tax is charged when you ‘dispose’ of an asset and your gains exceed the CGT allowance for that tax year. This could be by selling it, but also, potentially, if you give it away - even as a gift to unmarried partners, children or grandchildren.
It covers assets you hold in the UK, but also overseas assets, if you are a UK resident.
While income tax may well be deducted from your earnings automatically, it’s your responsibility to declare your capital gains and pay any tax that is owed.
This can be done through your yearly self-assessment tax return or you can use HMRC’s real time Capital Gains Tax Service. The exception is if you have sold a property that isn’t your main home – that would need to be reported separately to HMRC within 60 days of the sale completing.
Late payment penalties are charged if you fail to pay CGT. Depending on your circumstances, this could be as much as 5% of the tax you owe.
What are the capital gains rates in 2023?
The rate of capital gains tax that you pay depends on two things: your rate of income tax and the asset you are selling.
Currently higher rate taxpayers will pay 28% if they are selling residential property (but not their main home) or 20% on other chargeable assets.
For basic rate taxpayers those rates drop to 18% and 10% respectively.
It’s important to note though, that your gains will be added to your income for the year. This means that your capital gain might push you into the higher rate tax band and force you to pay CGT at the higher rate.
What counts as a chargeable asset?
CGT will only ever apply to so-called ‘chargeable assets’.
- Shares and investments
- Property that’s not your main home, for example a buy-to-let, second home or holiday let
- Business assets
- Personal possessions worth over £6,000 – this can include artwork, jewellery, antiques and so on (but not your car)
There are also some assets that you won’t have to pay CGT on. These include:
- Assets that you have gifted to a spouse or charity
- Investments and shares held in tax wrappers like ISAs, PEPs and pensions
- Money that you have won, for example in a lottery or from Premium Bonds
- Money in savings accounts and foreign currency
Do I need to pay CGT on assets I inherit?
Whether you inherit a portfolio of shares, a rental property or family heirloom you shouldn’t need to pay CGT straightaway.
But, if you sell your inheritance further down the line, you might need to pay CGT at that point.
For this reason it’s important to have an accurate valuation of the asset as soon as you inherit it.
Even though you may not have to pay CGT when you get an inheritance, it’s important to know that you might have to pay other taxes on it over time.
You might have to pay income tax on rent payments for example, or dividend tax on investment income.
How to work out your capital gains
To make sure you pay the correct amount of CGT, or indeed whether you need to pay it at all, you need to calculate your gain.
To do this you need to work out the difference between what you paid for your asset (or its value when you received it) and what it was worth when you sold or disposed of it.
This should be reasonably straightforward with personal possessions or property but it’s a bit more complicated with shares that were bought over a period of time.
As shares are likely to have been bought at different prices over time, you’ll need to work out an average cost for your shares. Whatever the asset you are selling, there may be costs that you can deduct from your gains. These could include:
- Home improvements on a property (not maintenance though)
- Estate agents and solicitor fees
- Costs you incur buying and selling shares
- The cost of selling personal possessions. This would cover any charges for advertising or selling them, but not any repairs
You are also able to offset any losses you have made against your gains.
These are called allowable losses. You’ll only need to pay CGT when your gains, after losses and charges, exceed the capital gains tax allowance.
When you declare your gains to HMRC, it will tell you how much CGT you will need to pay.
Capital Gains Tax FAQs
Please remember, investment value can go up or down and you could get back less than you invest. The value of international investments may be affected by currency fluctuations which might reduce their value in sterling.