What is Capital Gains Tax?

Capital Gains Tax (CGT) is a tax charged in the UK when you make a gain as a result of disposing of a belonging or asset. The term ‘disposal’ is used because you can incur CGT not only when you sell something but also when you give it away as a gift, swap it for something else of higher value or receive compensation for it due to loss, theft, or damage.

CGT only applies to the amount of gain made, so you will not be taxed on the full amount received from disposing of your possessions – only the difference between the original cost to you and in the final value at point of disposal.

In instances where you have not received any gain because you have disposed of the asset by way of gifting to someone, CGT can still occur where there is an increase in value on the asset. This is because it will be treated as if you had received the gain and gifted the amount to the recipient also. For example, if you were to have bought a valuable painting for £10,000 and gifted it to a grandchild at a time where its value had increased to £12,000, you would be liable to pay CGT on £2,000 even though neither you nor your grandchild physically receives this amount.

What do you pay Capital Gains Tax on?

CGT is charged on most items of value, generally considered to be worth at least £6,000. This can include items such as:

• Jewellery
• Antiques and collectibles
• Lorries and motorbikes
• Items of plant and machinery that are not permanently attached to a building
• Fine wine that can be stored for over 50 years
• Stocks and shares
• Property and land (that is not used as your main residence)
• Cryptocurrency and cryptoassets

This is not an exhaustive list and it is worth noting that there will be some items you may dispose of which CGT will not apply to.

What is exempt from Capital Gains Tax?

Not all valuable possessions attract CGT when disposed of. Some common examples where you will not have to pay CGT include:

• Private-use cars, including vintage cars
• Items or money which have been won through giveaway prizes, competitions, or betting
• Cash
• Assets held in ISAs
• ‘Wasting assets’ which are those items considered to have an expected life of 50 years or less, such as caravans or pleasure boats

In some instances, you do not have to pay CGT depending on who you are passing assets onto. You do not need to pay CGT if you gift anything to UK registered charities. Similarly, you can transfer personal assets to a spouse or civil partner without incurring CGT.

How much is Capital Gains Tax?

If you have incurred CGT, how much you will be charged will be dependent upon your personal income tax band and the type of asset that was disposed of. CGT is charged at different rates and are as follow for the tax year 2024/25:

• Basic rate taxpayer disposing of a residential property – 18%
• Basic rate taxpayer disposing of any other type of asset – 10%
• Higher or additional rate taxpayers disposing of residential property – 24%
• Higher or additional rate taxpayers disposing of any other type of asset – 20%

What is the Capital Gains Tax exemption?

The CGT exemption is a threshold amount set by the UK government which allows you to make disposals and receive a certain amount of gain tax-free. You only need to pay CGT once you have exceeded the exemption. The exemption is an annual exemption as opposed to a lifetime exemption, but it cannot be carried forward, so if you do not use it in one year, you cannot accumulate it and use it together with the following year’s exemption. For the tax year 2024/25 the CGT exemption is set at £3,000 for individuals and up to £1,500 for trusts. You can see the previous years’ exemption here which may be useful for those who are carrying forward losses.

How to calculate how much you need to pay for Capital Gains Tax

To calculate your CGT bill, you must first find out the gain made. Start by establishing the most up-to-date value of the asset that was disposed of. You may need a formal valuation to do this. Remember, you cannot simply sell or gift away the asset at a lower price than its value as this will not reduce the CGT. Next, you need to subtract the original cost of the asset that you paid to receive it. The difference is the taxable amount. If it turns out that you have not made a gain, but a loss, then there will be no CGT to be paid and you may instead choose to carry it forward to offset against future gains.

If you have made a gain, then you can start to reduce your CGT bill by deducting the CGT exemption. Anything remaining is the taxable gain. Add this amount to your annual income and subtract your personal allowance (£12,570 for any individual earning under £100,000 annually for the 2023/24 tax year). There may be other deductions that can be applied to help reduce your CGT bill further, but this will depend on your personal circumstances and you may want to seek advice from a chartered accountant for the most accurate calculation.

After all deductions have been made, the CGT rates you will need to apply will be dependent on whether the total falls above the basic income tax rate threshold (£50,270 for the tax year 2023/24) or not. For any amount that is over £50,270 the higher CGT rates will need to be applied (20% or 24% for residential property). For any amount that is below, the lower CGT rates can be applied (10% or 18% for residential property).

Example to illustrate how Capital Gains Tax works:

Your annual salary is £45,000 and you sell shares worth £50,000 that you originally paid £15,000 for. The gain made is £35,000 and the taxable gain is £29,000 once the CGT exemption has been deducted. Adding £29,000 to your annual salary and deducting your personal allowance leaves you with £61,430. This means that £5,270 of your taxable gain will be charged at 10% and the remaining £23,730 will be charged at 20%. Your CGT bill will come to £5,273.

How to reduce your Capital Gains Tax:

For those making disposals which will exceed the CGT exemption and fall above the basic rate income tax band, there are plenty of opportunities to effectively use tax planning in order to help reduce the bill including:

• Utilise all other allowances and exemptions
• Time disposals across multiple tax years
• Extend your basic rate income tax band through pension contributions and donations to charities
• Consider tax-free investment schemes
• Double exemption and allowances by combining with your spouse or civil partner
• Defer CGT on business asset disposals to the recipient

For more information and detailed guidance, read our full article on 10 practical ways to reduce CGT.

How and when to pay capital gains tax

How and when to pay for CGT is dependent on the type of asset that has been disposed of. Since April 2020, if you dispose of residential property which is not your main residence, you have only 30 days to report this disposal and pay the CGT. You will need a Capital Gains Tax on UK property account in order to be able to do this which you can register for here. Bear in mind you will also need a Government Gateway ID and password too in order to be able to register.

For all other assets, you can report the gain using the supplementary pages on your self-assessment tax return which is due 31 January in the next financial year following the date of the disposal. If you have never completed a self-assessment tax return form before because you have not needed to before, you will need to register. For guidance on how to complete the SA108 form for declaring CGT, you can follow the instructions in our article on how to fill a self-assessment form online.

There are various methods you can use to pay CGT but bear in mind the time it can take in order to ensure you have paid on time:

Same day or next day:

• online or telephone banking (Faster Payments)
• CHAPS
• Pay by debit or corporate credit card online
• At your bank or building society (you need a paying-in slip supplied by HMRC in order to be able to use this option)

3 working days:

• BACs
• Direct debit (if you have already set one up with HMRC)
• By sending in a cheque

5 working days:

• Setting up a new direct debit for the first time

What happens if you make a capital loss?

If you make capital losses when disposing of an asset that loses value against what you originally paid for it, you can report this to HMRC. This will help reduce any CGT you may have incurred in the same tax year. If you do not have sufficient gains to fully offset your loss, you can carry the loss forward up to four years to offset against future CGT. It’s important to note that you cannot use CGT loss to offset against income apart from in very specific circumstances. To declare your loss and claim relief you can complete this in the relevant sections of the self-assessment tax return form. If you have never made any gains before and do not complete a self-assessment tax return then you can write to HMRC instead to inform them. In this case, make sure you report any loss within 4 years of the disposal to ensure you do not lose the ability to carry it forward.

For help with calculating your CGT or to discuss ways to reduce it, please get in touch with us regarding our tax planning service.