How does Capital Gains Tax work?
Have you recently sold an asset? You might need to pay capital gains tax. Learn how Capital Gains Tax (CGT) affects property and other assets, and the key points of self-reporting.
You are liable to pay Capital Gains Tax (CGT) on gains made when selling, gifting or otherwise getting rid of an asset. This is collectively referred to as asset ‘disposal’, even if getting rid of it was beneficial to you. It’s important to get to grips with the fundamentals of the capital gains tax process, especially if this is the first time you’re affected by it.
Unlike other taxes you may be familiar with, capital gains tax is not automatically deducted from your income. Instead, you are required to report CGT yourself through a self-assessment tax return. It’s important to submit accurate reports on time to avoid paying hefty fines.
This guide will discuss how capital gains tax works on assets, such as shares and property, how to go about reporting it, and how to reduce your CGT bill.
How CGT works on property
You may be liable to pay capital gains tax when selling property that is not your main home. This includes second homes, houses you rent out, business properties, and even land. You’ll need to pay capital gains tax on properties you’ve inherited, but only when you come to sell it.
So, if you’re simply moving house, CGT probably doesn’t apply – unless you use your home for business purposes, rent out any of the rooms, or it has land larger than 1.2 acres.
Property assets have higher capital gains tax rates than other asset types. The rate you pay will depend on your income:
Basic rate taxpayers (taxable income between £12,571 to £50,270) pay 18% on gains from property sales.
Higher or additional rate taxpayers (on taxable income above £50,271) pay 24% on gains from property sales.
You’ll be pleased to know that capital gains tax is typically not applicable when properties are gifted to a spouse or a charity. You may also receive some tax relief if it is a property which can help you keep more of the proceeds and offset some of the capital gains tax.
It’s worth getting property valued as soon as it comes into your possession. The valuation will be an important piece of evidence to show whether the property has appreciated or depreciated over time. As you are only taxed on gains, not the entire sale amount, knowing the impact of value at the point of selling will help you calculate capital gains or losses.
If you aren’t investing within an ISA or SIPP yet, you’re missing out on tax-free savings!
For shares sold outside of tax wrappers, the CGT rates are as follows:
Basic rate taxpayers (taxable income between £12,571 to £50,270) pay 10% on gains from share sales.
Higher or additional rate taxpayers (on taxable income above £50,271) pay 20% on gains from share sales.
The above rates typically apply to most other asset types, excluding property, which we covered in the previous section.
Calculating and paying capital gains tax
Preparing your capital gains tax report can be a complex process, especially if you’ve recently disposed of several assets or if this is your first time paying this tax. There are several key considerations, such as tax rates and allowance, paying and submitting, and anything that may reduce the amount you owe.
Here are a few points to get you started:
1. How do I work out how much capital gains tax I owe?
Regular and accurate record keeping is key to knowing exactly how much gains you made from selling assets. You’ll need to know how much you bought something for, and how much it was sold for to determine the exact gains - or even to establish any losses. If you inherited or were gifted an asset, get these valued as soon as they enter your possession.
You’ll pay capital gains tax only on the gains made upon the disposal of an asset. For example, let’s say you buy shares for £3,000 which are not held in a tax-free account. The shares grow over a few years and you eventually sell them for £12,000. An initial gain of £9,000.
Taking into account the current capital gains allowance of £3,000 (also known as capital gains exemption), you will only need to pay CGT on the remaining £6,000. Depending on whether these gains place your taxable income into the basic rate or higher and additional tax rate bracket, you will pay 10% or 20% respectively.
If you bought, grew, and sold these shares within an ISA, then you don’t need to pay any tax.
2. When do I need to submit the CGT report?
Capital gains for shares and assets - excluding property - need to be reported by 31st December in the tax year after the gain was made. You can certainly submit and pay before these dates, so no need to leave your reports until after the Christmas dinner. For example, if you sell your shares on February 20th 2024, you have until December 31st 2024 to submit your report.
Reports for gains made from property and land disposal have a much shorter deadline. You must calculate, submit, and pay CGT within 60 days of the sale completing.
3. How long do I have to pay capital gains tax?
After submitting your report, which has to be done by 31st December in the tax year after the gain was made as aforementioned, you have until 31st January to pay - exactly one month after the report deadline. The deadline to pay for gains made within the current tax year is 31st January 2025.
You typically pay the CGT owed in one lump sum to HMRC. Instalments are possible in special circumstances, such as if the asset is gifted, or when the proceeds of the sale are gradually paid out to you.
4. Carrying forward capital losses
While your capital gains tax allowance can’t be carried forward, you can make use of losses accrued. If you find yourself making losses during the disposal of assets, you are entitled to report these and offset the amount of capital gains tax you owe in future tax years.
What other taxes do I need to consider?
It’s important to know that capital gains tax does not exist in isolation. When calculating and reporting, you need to consider the overlap between CGT and other taxes, such as dividend tax and income tax.
You may also be entitled to additional tax reliefs which could reduce how much tax you need to pay on your gains. It’s worthwhile seeking advice from an independent financial advisor to discuss your circumstances before submitting your upcoming report.
How can I reduce my CGT bill?
It can be disheartening to see your well-earned profit syphoned off for taxes, but there are tactical steps you can take to legally reduce your CGT liability in future.
Shares are relatively straightforward to protect. ISAs and pension accounts, such as a SIPP are ‘tax wrapped’, meaning they are exempt from taxes. If you regularly invest, or are beginning your investing journey, growing your shares in one of these accounts means you get to keep all the profits when you decide to sell part of your portfolio.
Not all investment types can be held in our SIPPs, so make sure the account is right for your investments.
The value of your investments may go down as well as up. You may not get back all the money that you invest. If you are unsure about the suitability of an investment product or service, you should seek advice from an authorised financial advisor.
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