The amount of capital gains tax (CGT) you pay can be reduced by using available capital gains allowances and reliefs.
What is chargeable to capital gains tax?
Capital gains tax becomes payable when the disposal of certain categories of asset leads to a profit, otherwise known as a ‘gain’. It is this gain which is taxed, not the sale value of the asset.
Where certain assets are disposed of by an individual, a business partnership or a trust, capital gains tax is chargeable on any resulting gain.
Capital gains tax does not apply to companies. Instead, a company will pay corporation tax on any gains they make, although capital gains legislation may come into play in certain circumstances.
Assets which may prove chargeable for CGT when disposed include:
- business assets (the business itself, plant and machinery, registered trademarks)
- residential property other than the main place of residence (holiday lets, rental properties)
- non ISA or non PEP shares
- personal belongings valued at over £6,000 (works of art, jewellery, antiques)
Exemption from capital gains tax includes gains made from the disposal of:
- a private car
- personal belongings up to the value of £6,000
- a property that is your main home
- gifts made to a spouse or civil partner
- gifts made to a charity
- ISAs or PEPs
- UK government gilts and premium bonds
- winnings from betting, lottery or pools
Although capital gains tax is not chargeable on gifts made to a charity, assets sold to a charity may be chargeable where the sale price was less than the market value but more than you originally bought it for.
The UK assets of non-UK residents are generally not liable for capital gains tax unless the non UK resident returns to the UK in under 5 years of their initial move abroad. The exception to this is residential property which since 6 April 2015 is chargeable with regard to capital gains tax.
Capital gains reliefs and exemptions
A capital gains tax liability is incurred when a chargeable asset is disposed of and the gains for that specific tax year add up to more than your Annual Exemption Amount, that is, your yearly tax-free allowance:
- The 2023/2024 capital gains tax-free allowance is £6,000, or £3,000 for trusts.
- The 2024/2025 capital gains tax-free allowance is £3,000, or £1,500 for trusts.
The full annual tax-free allowance applies to each partner in a marriage or civil partnership individually, which can be advantageous when it comes to the disposal of jointly-owned assets.
It is not possible to carry forward or back any capital gains annual exemption. It must be used within the relevant tax year.
How to calculate your capital gains tax liability
The annual capital gains allowance makes it possible to receive gains up to a specific value within each tax year, before capital gains tax becomes payable.
Calculate the gain received by disposing of an asset by deducting the purchase price of the asset from the sale price, bearing in mind any permitted deductibles for the asset.
The relevant capital gains tax rate will depend on whether you are a higher rate tax payer (20%) or a basic rate tax payer (10%).
For a higher rate tax payer, your total capital gains, once any capital gains allowances have been accounted for, will be taxed at 20%. Where the gain is from the sale of residential property, a higher rate of 28% applies.
When calculating the capital gains tax liability for a basic rate tax payer, their annual taxable income (annual income less personal tax allowance) must be added to their total gains for the tax year, bearing in mind any applicable tax exemptions, reliefs or losses.
If the resulting figure, less any capital gains annual exemption, is below the basic income tax rate, it will be taxed at 10%. If the gain was made from the disposal of residential property, the applicable tax rate is 18%.
Where the resulting figure, income and gains less any exemptions and allowances, is more than the basic income tax rate, the higher tax rate 20% charge will be incurred, or 28% in the case of the disposal of residential property.
Capital gains allowances – other factors to consider
There are several other factors that may affect how much capital gains tax you are charged and the availability of capital gains allowances. These include:
Married couples and civil partnerships
Where assets are jointly owned by a married couple or civil partners, each partner is assigned the full capital gains allowance, doubling the value of gain they are allowed to receive from the disposal of that asset before a capital gains tax liability is incurred.
Where one partner transfers an asset wholly to the other partner, however, the capital gains allowance will be reduced back down to that partner’s individual allowance.
Capital gains tax is generally not chargeable on assets given or sold to a spouse or civil partner, with the exception of when the couple have separated and are living apart in the tax year when the gift is made, and when the asset was gifted for the purpose of disposal through a business.
Should the partner in receipt of the gift dispose of it, capital gains tax may be chargeable to them.
Gains incurred from the disposal of a combination of assets
Where you have made gains from the disposal of a combination of assets that may be taxed differently, for instance, residential property and shares, your capital gains allowance may be used to offset the highest rate gains.
For instance, where the gains of a higher rate tax payer are from the sale of a holiday let cottage (28% tax rate) and a piece of art valued at over £6,000 (20% tax rate), the capital gains allowance may be used against the gains made from the sale of the holiday let cottage first.
Disposal of assets resulting in a loss
If the disposal of a chargeable asset means that you incur a loss, rather than a gain, this loss may be registered as an allowable loss and offset against any gains in that or a future tax year.
For instance, if your capital gains for a tax year amounts to more than your tax-free allowance, you may reduce this amount by applying any unused loss from a previous tax year.
If the resulting reduction, means that your annual capital gains are within your tax-free allowance, any leftover losses may be carried forward to the next or a future tax year.
Allowable losses must be reported to HMRC via your self-assessment tax return, registering them against the related asset no more than 4 years after the disposal.
Capital gains allowances – final word
When calculating annual capital gains made from the disposal of one or more assets, it is important to always take into account your personal tax situation and any factors that may reduce your capital gains tax liability to HMRC.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute tax, financial or legal advice, nor is it a complete or authoritative statement of the rules and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.
Before acting on any of the information contained herein, expert tax, financial, legal or other advice should be sought.