Capital Gains Tax (CGT) is a complicated area of tax-planning and can trip many of us up. It’s wise to get your head around CGT and take financial advice, so you don’t end up paying more than you need to.
Here’s some answers to some of the most frequently asked questions about this often-misunderstood tax.
What is Capital Gains Tax?
CGT is a tax on the profit you make when you sell something that has increased in value. CGT applies only to the gain, not the amount of money you receive for the asset. So, if you bought some shares for £10,000 and sold them for £15,000, your capital gain or profit is £5,000. That’s the amount assessed for CGT.
Every tax year you have a personal CGT allowance. In 2023/24 it’s £6,000 reducing to £3,000 from April 2024 for individuals. This means you can currently realise gains of up to £6,000 (after taking away any losses and applying any reliefs) and pay no CGT. If you don’t use your allowance in a tax year, you can’t carry it forward like some other tax allowances.
What do you pay CGT on?
Gains from almost any kind of personal possessions can be liable to CGT, including shares and investments, buy-to-let properties, second homes, and other possessions like art. A financial adviser can help work out how much you will pay.
It’s important to remember you don’t have to pay CGT if all your gains in one tax year are below your tax-free exemption.
Which assets don’t you pay CGT on?
You don’t pay any CGT on assets held in a pension or ISA. Nor do you have to pay CGT if you sell your car, or the home you live in (provided that you have lived in it throughout the entire period you have owned it). But if you have used the property for a business, or let it out, or it’s your second home, then you’ll usually have some CGT to pay.
You don’t have to pay CGT on assets you give away to charity. However, you could be liable if you sell an asset to charity for more than you paid for it, or less than its market value.
How much CGT will I have to pay?
The rate of CGT that you will pay will depend on your other income. If you are a basic rate taxpayer and the gains on any assets sold are within your Income Tax basic rate band, you’ll pay 10% for most assets and 18% on residential property that is not your home that you live in. If your combined income and gains are above the higher rate threshold, you’ll pay 20% for most assets and 28% on residential property.
How can I reduce my CGT bill?
There are a number of options if you want to reduce the amount of CGT that you pay. It will, however, be dependent on your personal circumstances, and you may need to manage the reduction over time – which is why expert financial advice is very important.
Gift assets to a spouse or partner
Most sales or transfers of gifts between spouses or civil partners are free from CGT. By transferring assets to them, you can take advantage of your combined CGT exemptions. It might also be sensible to stagger disposals of chargeable assets over two tax years to make use of two years’ allowances. In 2023/24, the amount would be £6,000 and in 2024/25, £3,000.
Increase your pension contributions
The amount of CGT you pay is linked to your rate of income Tax. So if you are able to pay more into your pension, you’ll be reducing your taxable income – which may alter your tax band, and reduce the rate of CGT that you’re charged.
Make use of your full annual allowance
With CGT, you can’t carry forward any unused allowance from the previous year. But if you sell your assets gradually over a number of years, instead of all at once, you can keep the gains just within the annual allowance and avoid a CGT bill.
Maintain or improve your assets
If you make improvements to a holiday home, or conserve a valuable painting, you can write off those costs against tax.
A ‘bed and ISA’ is when you sell investments (the ‘bed’ half of the phrase) and use the proceeds to purchase similar investments within an Individual Savings Account wrapper. This gives investors the opportunity to transfer investments from a taxable environment to a tax-efficient ISA where future gains will be free of CGT. Remember that you will not pay CGT on disposal of existing taxable investments if your gain is within your annual exempt amount but otherwise there could be some CGT to pay at the time of the disposal.
What can I do if I make a loss on an asset?
If you make a profit when selling one item, but a loss when selling another, you can deduct the loss from the gain when working out how much tax you owe.
You can carry forward any losses that haven’t been used to offset gains indefinitely (provided that the loss is claimed within four years of the end of the tax year of disposal). Even if you don’t owe any CGT, it’s therefore still important to submit details of losses in your tax return to make it easier to offset them against a potential gain in future years.
What happens if I sold my business?
You may be able to qualify for Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) if you are a sole trader or business partner, and you’ve owned the business for at least two years. The relief reduces the rate of CGT on disposals of certain business assets from 20% to 10%.
Get in touch
Taking good advice from us can help you feel confident about your decisions, and comfortable that you are in control of your financial affairs. Just get in touch to talk it through.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.
SJP Approved 27/06/2023