Capital Gains Tax (CGT) is a tax applied to the profit from selling or gifting an asset. The profit is calculated by subtracting the asset's purchase price from its selling price.
CGT captures the excitement of profit and applies it to your asset-owning journey. When it's time to part with your valuable possessions, it's important to consider the potential tax implications arising from your accumulated gains. In this blog, we’ll discover, “what is capital gains tax?”
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What is Capital Gains Tax?
Capital gains tax is a type of taxation imposed by the government, specifically targeted at the gains realised from the appreciation in the value of assets held for a period exceeding one year.
When you sell or transfer ownership of an asset, you have to pay capital gains tax (CGT) on the profit. Profit here means the difference between what you initially invested in the asset and the amount you receive when you sell or transfer it. This difference represents the capital gain, which is potentially subject to taxation.
For example, if you bought Amazon shares for £5,000 and sold them a few years later for £20,000. In this scenario, the gain you achieved amounts to £15,000, the portion susceptible to taxation.
When Does Capital Gains Tax (CGT) Apply?
CGT is applicable when you sell, give away, exchange, or dispose of an asset, with certain exemptions for specific assets. If you are a UK resident, CGT may apply to the disposal of assets worldwide, not just those in the UK.
Non-residents can be liable for CGT if they engage in trading activities in the UK. Non-residents, including those in the overseas part of a split year, might be subject to CGT when disposing of UK land and property (although private residence relief may apply).
For UK residents who temporarily reside outside the country (typically for less than five years), there are specific CGT rules to consider, which we will address separately.
You may also be required to pay CGT when you gift an asset to someone. The rules vary depending on the recipient; specific reliefs are available for business assets. Get more information on this topic on the GOV.UK website.
Furthermore, CGT can apply in situations involving the transfer of assets during separation, divorce, or dissolution of a civil partnership.
Assets Liable for Capital Gains Tax
Capital Gains Tax (CGT) applies to various assets, including:
- Properties that are not your primary residence like buy to let or holiday let.
- Shares not held within an Individual Savings Account (ISA) or a pension.
- Business assets.
- Personal possessions with a value exceeding £6,000, such as:
Assets Not Liable for Capital Gains Tax
- Motor vehicles are used for personal purposes, such as passenger cars. This exemption also applies to classic cars.
- Racing cars.
- Taxi cabs.
- Single-seat sports cars.
- Commercial vehicles, like lorries, vans, buses, etc.
- Motorcycles, scooters, and similar vehicles.
How Much Will You Need to Pay?
The amount you are required to pay for Capital Gains Tax (CGT) depends on several factors:
The profit you have made
The tax is calculated based on the difference between the asset's selling price and its value at the purchase or receipt, considering associated costs.
The type of asset
Assets are categorised as property or 'other chargeable assets.
Your income tax band
The rate of CGT you pay is determined by whether you fall into the basic or higher-rate taxpayer bracket.
- For higher or additional rates taxpayers
- Gains from residential property are subject to a 28% CGT rate.
- Gains from other chargeable assets are subject to a 20% CGT rate.
For basic rate Income Tax payers
- Gains from residential property within the basic rate band incur an 18% CGT rate, while gains within the higher rate band are taxed at 28%.
- Gains from other chargeable assets are subject to a 10% CGT rate.
Your current tax-free allowance
The CGT tax-free allowance is £6,000 for individuals and £3,000 for trusts. This means that the first portion of your gains within this allowance is not subject to tax.
UK Capital Gains Tax for the 2023/24 Tax Year
As of the 2023/24 tax year in the UK, the capital gains tax rates are as follows:
- Basic rate taxpayers: 10% on any gains realised.
- Higher rate taxpayers: 20% on any gains realised.
Suppose you purchased shares for £10,000, sold them for £30,000, and made a profit of £20,000. For a basic rate taxpayer, 10% of the gain (£2,000) would be subject to capital gains tax. A higher rate taxpayer would be required to pay 20% of the gain (£4,000) in capital gains tax.
Annual Capital Gains Tax Allowance
The UK government offers a valuable benefit known as the annual capital gains tax allowance. It's good news for individuals looking to minimise their tax liabilities. This allowance allows any individual to realise gains up to £6,000 within a single tax year without being subject to capital gains tax.
Let's revisit our previous example of a £20,000 gain. Assuming no other gains were made elsewhere, the annual allowance can be utilised to reduce the taxable gain to £14,000. For individuals falling within the basic tax rate, a capital gains tax of £1,400 would be levied on this reduced amount. For higher-rate taxpayers, the tax liability would be £2,800.
How to Reduce Capital Gains Tax
To reduce the capital gains tax you pay:
- Maximise your annual CGT allowance by strategically selling investments and utilising tax-efficient accounts like ISAs.
- Consider seeking guidance from a financial planner for effective CGT reduction strategies.
- Explore tax-efficient investments and pension options.
- Offset capital gains by selling investments with losses (tax-loss harvesting).
- Gift assets instead of selling them to minimise CGT liabilities.
How to Calculate Capital Gains Tax
The following are the steps to calculate Capital Gains Tax (CGT):
- Determine the gain or profit from each asset sold or disposed of during the tax year.
- Add together all the gains from different assets.
- Deduct any allowable losses incurred.
- Subtract the annual CGT allowance (£6,000 for the 2023/24 tax year).
Continue reading: Demystifying Capital Gains Tax on Property: Your Comprehensive Guide to Understanding and Minimising Tax Liabilities
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