Until the government starts taxing sex, capital gains tax (CGT) is probably the most annoying tax to find yourself paying.
Capital gains tax is levied on the profits you make when you sell or transfer most assets. These assets include shares, investment properties – even a stake in your own company.
Like a fly in your soup spoiling your birthday, capital gains tax can really spoil the fun of making money.
Inheritance tax is a tax on your good fortune. Income tax is the cost of having a job. And CGT is a tax on investing success.
Take shelter from CGT! Always try to use tax shelters like ISAs and pensions to shield your investments from taxes where possible. No tax is payable on gains realised within these wrappers.
Of course, you won’t always make a profit when you sell an investment.
Sometimes you’ll lose money. That’s called a capital gains loss. Unfortunately you don’t get money back from the government for losing money.
However you can offset capital losses against your capital gains to reduce the total gain you pay tax on. You can also defuse unsheltered gains using your annual CGT allowance.
How UK capital gains tax works
Like income tax, CGT is calculated on the basis of the tax year. This runs from 6 April to 5 April the following year.
You pay tax on the total taxable gains you make selling assets in the tax year, after taking into account:
Your annual CGT allowance. (See below).
Other reliefs or costs that can reduce or defer the gains.
Allowable losses you made by selling assets that would normally be liable for CGT. (The opposite of a capital gain, in other words).
Everyone has an annual capital gains tax allowance, or ‘annual exempt amount’ in HMRC-speak. This allowance is £12,300 up to 5 April 2022. However, the allowance will be halved to £6,000 from the 6 April 2023. It will halve again to £3,000 from the tax year 2024-25.
If your total taxable gains, minus any deductions, comes to more than your annual allowance, then you pay CGT on everything over that tax-free allowance.
Capital gains tax rates
There are several different rates for capital gains tax. The rate you’ll pay normally depends on two things:
Your total taxable income.
What sort of assets you’ve made a profit on. Second homes and buy-to-let properties are taxed at different rates from other assets.
For most taxable assets:
Basic rate taxpayers pay 10% on their capital gains.
Higher rate taxpayers pay 20%.
For second homes and buy-to-let properties:
You’re charged 18% at the basic rate on your property gains.
Higher rate taxpayers will pay 28%.
Your main home is nearly always exempt from capital gains tax under what’s called Private Residence Relief. This is automatically applied unless you’ve let your home out to more than a single lodger, used it for business, or if you’ve substantial acreage. In those cases, CGT might be payable.
Note that you might normally be a basic rate taxpayer, but pay a higher rate on your capital gains. This could happen if the money made via your gains moves you into the higher rate tax bracket.
To work out what rate you’ll pay, your capital gain is added to your taxable income from other sources (salary, dividends, savings interest, and so on).
It can get a bit complicated. See HMRC’s notes on working out your capital gains tax rate band.
What is CGT charged on?
The good news is CGT is a fairly avoidable tax for most investors in the UK.
(Remember, you’re allowed to mitigate your taxes. Tax evasion is illegal.)
Most capital gains on asset sales are taxable, but in the UK capital gains tax is NOT charged on:
Your main home (in 99% of cases)
UK Government bonds (gilts)
ISA and SIPP holdings
Personal belongings worth less than £6,000 when you sell them
Your car, unless used for business
Other possessions with a limited lifespan
Betting, lottery or pools winnings (including spreadbets)
Money which forms part of your income for Income Tax purposes
Venture Capital Trusts
Certain business holdings that qualify for entrepreneur’s relief
That still leaves many key assets liable for UK capital gains tax:
Gold (unless UK coins)
Remember if you can hold these assets inside a tax shelter (ISA or pension) you’ll escape the clutches of capital gains tax.
As I’ve already mentioned, you also have that annual capital gains tax allowance.
So you won’t necessarily be liable for CGT just because you’ve sold some taxable assets and made a profit. It all depends on your total capital gains for the year.
You might also be able to postpone paying your CGT bill by claiming deferral relief on certain special government-sanctioned investment schemes (EIS and SEIS). However these investments can be very risky.
Do your research, and don’t risk big losses just to cut your tax bill.
When to report capital gains tax
You need to report your taxable gains via your self-assessment tax return:
If your total taxable gain in the tax year exceeds your CGT allowance, and/or
If your sales of taxable assets are in excess of four times that allowance. From 6 April 2023, you’ll need to report any sale in excess of £50,000.
Under the current regime for example, if you sold £20,000 worth of shares in the year for a total gain of £5,000, there’s no need to report any of it. £5,000 in gains is below the annual allowance. And your total sales were less than four times the annual allowance.
In contrast, if you’d sold £55,000 of shares, say, you would have to report the details to HMRC, regardless of your total gain. (Four times the allowance is £49,200. You’ve sold in excess of that).
From 6 April you won’t have to do any maths. The reporting threshold is fixed at £50,000.
Capital gains are pooled together
All capital gains and losses go into the same ‘pot’ from the Inland Revenue’s point of view.
For example, if you made a gain (that is, after your costs) of £15,000 selling shares and £8,000 selling an antique wardrobe, your total capital gain is £23,000.
Here losses might help you out.
For example, let’s imagine you make a taxable gain on your shares but a loss on selling your buy-to-let property. Your property loss can be offset against your capital gains on shares to reduce or even wipe out the tax bill that might otherwise be due.
See my article on avoiding capital gains tax for other strategies.
Update: since I first wrote this article I bought my own home and paid Stamp Duty Land Tax at 5%. Turns out that’s almost as annoying.Held personally. Properties held via a limited company are on a different regime.Remember, these are sales outside of an ISA or SIPP. Sales within shelters are not liable for CGT and not counted at all.
The post Capital gains tax in the UK appeared first on Monevator.