Capital Gains Tax: The Basics

What is Capital Gains Tax?

Everyone has items that are no longer wanted, items to sell to other people and possibly made a profit. In most cases once the sale transaction is complete nothing else needs to be done. However when we are selling expensive items, such as shares in a company or even a house, these could be liable for Capital Gains Tax (CGT).

What Assets do I pay Capital Gains Tax on?

CGT is a tax on the profit, or gain made from when you sell or “dispose” of an item or asset. It doesn’t have to be sold to count as disposed of for Capital Gains Tax. If you exchange it for something else, receive compensation for it (such as it being damaged and you receive a payout), or give / transfer it to someone else it could be liable for Capital Gains Tax.

For example, you bought a painting for £8,000. You later sold it for £13,000. You would be liable to pay CGT on the £5,000 gain you made. If there were any costs associated with the sale, auction expenses in this example, you would be able to subtract this cost from the gain and reduce your CGT.

Do I have a Personal Allowance for CGT?

In the same way as Income Tax, everyone has a personal allowance for Capital Gains Tax. This is a tax free amount you can earn each year before you have to pay CGT.

Currently, as of April 6th 2023, this amount is £6,000. Before this date the allowance was £12,300. This allowance counts for the total amount of gains from all sales that are liable too CGT. In the above example you would not have any CGT to pay if this was the only asset sold in 2023.

Can I transfer assets to not pay CGT?

The CGT allowance is the same for everybody. Assets transferred between spouses are exempt from CGT. This provides a handy way of reducing any taxable gains if you are married. If one spouse has used up their CGT allowance they can transfer an asset(s) to their spouse, providing that the allowance hasn’t already been used up on their own CGT liable gains.

Does Capital Gains Tax have different rates?

CGT is charged dependant on which income tax rate band you are currently charged at.

• If you are in the 20% (basic)income tax rate band – you pay CGT at 10%
• If you have used your 20% income tax rate band then you would pay CGT at 20%

There is an exception for residential property sales; the first is charged at 18% CGT. Any subsequent sales will be at 28% CGT – when you have used up your 20% tax rate band.

How does CGT impacts Income Tax rate bands?

The tax free allowance for CGT is in addition to your personal allowance for income tax. However capital gains adds to your other income when determining which tax bracket the gain is in. Capital gains is added after everything else when calculating tax rates, so it is the most likely thing to reach the higher rate tax bracket.

What if I make a loss when selling an asset?

Sometimes an asset is sold and you make a loss. When this happens you can set this loss off against any gains for that year. This is the same as if you made a loss in a self-employed business.

If you do have Capital Gains Tax to pay, you will need to complete a self-assessment tax return to report it to HMRC. You will follow the same deadlines as you would if you completed a self-assessment tax return for taxable income. There is an exception for residential properties which we will cover in another blog.

Are their Capital Gains Tax exemptions?

Not all assets are liable to CGT, otherwise we would have to fill in a tax return and pay tax every time we sold something. Assets exempt of CGT are everyday items where the proceeds from disposal are less than £6,000, as well as cars and other assets expected to have a lifespan of less than 50 years. If you sell the house that you are living in you do not pay CGT on this sale.

If you make a loss on an exempt asset, you cannot claim the loss against gains for the year, the process unfortunately works both ways.

You can find more information about what is liable for CGT by clicking this link.

We will be covering the individual rules for selling houses, everyday items and shares in separate blogs. In the meantime if you feel you would like assistance or have any questions regarding the above, please do not hesitate to contact us.