- Financial planning
- 4 minute read
Capital Gains Tax (CGT) is the tax that applies to the gains that you make when you dispose of your assets. This includes when you sell it, swap it for something else, give it away in the form of a gift, hand it over to someone else, or get compensation if it has been destroyed or misplaced, for example. The specific assets that are affected by CGT are: property, investment funds, shares, jewellery, and paintings, to name a few.
Every UK citizen receives an annual Capital Gains tax-free allowance of £12,300. This means that any profits that you make in one year that fall into this price bracket will not be subject to CGT charges.
Your household income will also affect the CGT rate that you pay on your assets and it is worth noting that if you are a higher or additional-rate taxpayer, your CGT rate will exceed the standard costs, subjecting you to payments of 28% on gains made on residential property and 20% on any other chargeable assets.
If you’re wondering how Capital Gains Tax could affect you, find out how it works and what it applies to below.
What do you pay it on?
Capital Gains Tax applies to ‘chargeable assets’ when you sell or dispose of them.
These include:
- Property that you own that isn’t your own residence,
- The majority of personal possessions that you own worth £6,000 or more,
- Business assets,
- Shares (excluding ISAs or personally equity plans),
- Your own residence if you rent it out or use it for business purposes.
It is possible however to reduce the amount of Capital Gains Tax that applies to your assets. There are many strategies that you could implement, but one of the most effective and straightforward is to transfer your assets to a spouse or civil partner. This will enable you to combine your annual CGT tax allowance, permitting you to make gains of up to £24,600 before you are liable to pay CGT charges.
What is the Capital Gains Tax rate?
As we previously mentioned, the higher your household income, the more Capital Gains Tax you will be liable to pay.
To reiterate, if you’re a higher or additional-rate taxpayer, you will pay:
- 28% on residential property gains
- 20% on other chargeable assets’ gains
As a basic rate taxpayer, the CGT rate that you’re liable to pay will depend on your taxable income, whether the gain is from residential or other chargeable assets, as well as the size of your gain. You’ll firstly want to calculate your taxable income, which is the value that you get when you deduct your personal allowance and other income tax relief entitlements from your total income. If you do fall in this basic tax bracket, then you’ll be liable to pay 18% on residential property and 10% on any other chargeable assets.
What assets are exempt?
Unless your total annual gains exceed your annual tax-free allowance, you won’t be required to pay Capital Gains Tax. Additionally, some assets are exempt from CGT charges, so if you’re yet to invest and are conscious about the tax charges that may apply to your gains, these following assets could prove to be attractive investments:
- Shares and funds that are contained within an ISA or pension fund,
- Your main residence — if you don’t let it out or use it for business purposes,
- Any personal belongings that you own that are worth £6,000 or less,
- Assets that you donate to charity,
- UK government gilts,
- Premium bonds,
- Betting, pool, or lottery winnings.
When considering how to invest and what to invest in, you should take CGT into consideration, since this will have a significant impact upon the potential gains that you will make.
To avoid CGT charges, you might choose to place your capital in a stocks and shares ISA, since this is a tax-efficient investment. Alternatively, you may decide to invest in your future by planning towards your retirement and depositing capital in a pension account. This way, you can save, invest, and prepare for life beyond employment, without being impacted by CGT charges.
How do you work out your taxable gains?
Working out your taxable gains is surprisingly straightforward. Firstly, you need to work out the gain that you have made on each asset, or if you co-own the asset, you’ll need to work out your share. You’ll need to ensure that you do this for every asset that you’ve disposed of in that tax year, which spans from 6th April to 5th April of the following year.
From here, you’ll want to combine the value of the gains from each of these assets and then deduct any allowable losses (any loss that you make when you dispose of an asset). Of course, if your total taxable gains exceed the annual allowance then you will be required to report this to HMRC and pay the Capital Gains Tax that you are liable for. On the other hand, if gains fall under the allowance bracket, you will be exempt from CGT.
If you’re considering disposing of your assets and anticipate that you may be liable to pay Capital Gains Tax, then it’s worth planning ahead and doing your research. There are multiple ways that you can reduce the amount of CGT that you are required to pay, but there are also strategies that could help you to avoid the cost altogether.
If you’re new to investing and are unsure of how best to spend your capital or navigate the various legalities and charges involved, then it can be helpful to work with a financial adviser. Investments are risky because markets are volatile and assets are vulnerable to dips in value. As a result, you could risk losing your capital if you don’t follow sufficient precautionary measures.
To find out more or if you have any questions about financial advice, contact us to find out how we can help.
Please note that any tax benefits will depend on your personal tax position and rules are subject to change. The value of investments can go down as well as up, and you may get back less than you invested.