What is capital gains tax?
You may need to pay capital gains tax if you’ve made money selling assets like property or shares.
When you sell an asset, like a rental property or a painting, you may need to pay capital gains tax (or CGT) on the profit you make.
Some people will never pay CGT because they don’t make enough profit on a particular kind of asset but it’s still useful to understand the rules so that you don’t accidentally fall foul of HMRC rules.
Capital gains tax is one of the more complicated taxes in the UK but relatively few people pay it each year. Once you’ve read this guide you’ll know when you need to worry about it and if you need to get some advice.
Who pays capital gains tax?
Capital gains tax becomes due when you sell certain kinds of assets and those assets have gained in value since you bought or received them.
Personal possessions worth £6,000 or more usually qualify for the tax, although not your car and usually not your main home. So paintings, jewellery, your collection of mid-17th centuries snuff boxes, would all be potentially subject to the tax if you sold them for a profit.
More commonly, any other property you own like a second home or buy-to-let would be subject to CGT, as would any business assets or shares that you hold outside of a tax-free wrapper like an ISA or pension.
You don’t need to pay it on money you’ve made through betting or a lottery win, or from government gilts.
A quick note on capital gains tax on house sales
You don’t pay CGT when selling your main home because of Private Residence Relief, but not all properties qualify for that tax break. You may still need to pay if your main home has been solely used for business for a period of time, if you’ve rented it out at all, or if the building grounds are over an acre in total.
If that’s the case then it may be a good idea to seek the help of a tax professional.
How much is capital gains tax?
Each year you have a CGT allowance, which is the amount you can earn by selling assets without having to pay any tax.
In the 2021/22 tax year, you can make £12,300 from the sale of assets without paying CGT.
After that, basic-rate taxpayers pay 10% on any profits made from the sale of non-property assets and 18% of the profits made on any sale of property.
Higher and additional-rate taxpayers are charged 20% on the profits made by selling assets, except for property where they pay 28%.
If you’re a basic-rate taxpayer but you make enough of a gain selling an asset that it nudges you over into the higher-rate then you will only pay the higher rate on the amount you’re over the line by.
It can all be a bit of a minefield so the government has created a CGT calculator for the sale of property, a calculator for when you sell shares and guidance for working out the gain on personal possessions.
If you’re worried about working it out then you could seek professional advice or there’s an HMRC helpline – ring 0300 200 3300.
You will need your Self-Assessment Unique Taxpayer Reference to use that helpline, if you don’t have one then register for self-assessment and you should receive one.
When do you pay capital gains tax?
You can report and pay any CGT due after a sale or trade by using the Government’s ‘real time’ Capital Gains Tax service. While this can be done immediately, you have until 31 December of the following tax year.
You can also report gains using a self assessment tax return in the following year.
However, if you sold residential property after 6 April 2020, you must pay any CGT due within 30 days of the sale. If you do not, you could be subject to interest and a penalty.
How to avoid capital gains tax
It’s really important to declare and pay any capital gains tax you owe or you could find yourself facing additional penalties. However, there are ways to reduce your tax bill.
Make use of your allowances. Any of your annual £12,300 CGT allowance that isn’t used in one year cannot be rolled over into the next. So if you know you will be selling a series of assets, then spreading those sales over multiple tax years can make a significant difference to the amount of CGT you end up paying.
Work with your spouse or partner. Married couples and civil partners can also effectively combine their CGT allowances by transferring assets between them (before disposal) - giving a total allowance of £24,600 a year. However, for this to work, any assets transferred must be outright gifts.
Offset any losses against your gains. You only need to pay the tax on your overall profits rather than on every individual sale where you make a profit.
And, although your CGT allowance can’t be rolled forward to future years, you can factor in losses and offset these against any gains made in the same year. You have up to four years from the end of the tax year where you made the loss to register it with HMRC.
There are slightly different rules for when you sell to a ‘connected person’ like a family member or business partner as you can’t sell to them at a loss or give it to them and then offset that against gains elsewhere.
Use your £20,000 annual ISA allowance to reduce capital gains tax on shares. Your ISA allowance can be used for cash savings, stocks and shares, or innovative finance products – or a mix of all three. Gains made on stocks and shares held in an ISA wrapper can’t be touched by HMRC.
Claim losses on any assets without selling them if they become worthless. There’s special guidance for this available via HMRC.
Before attempting any ideas like these, make sure to seek advice by talking to an accountant or tax advisor so you can be sure you’re acting within the rules.
» MORE: How tax relief works
Do you pay capital gains tax on an inheritance?
Very few people are regularly making the kind of sales that mean they have to pay CGT. But you may find you need to pay it if you inherit and then sell an asset.
When someone dies, their estate may need to pay inheritance tax depending on its value. Currently, this applies to estates over £325,000, but that can be higher depending on a few different factors.
However, you won’t need to pay CGT until you come to sell any inherited property or assets. At that point you would pay CGT on any increase in value from when it came into your possession.
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Felicity is a personal finance journalist. She regularly writes for The Times, The Mirror and The Independent. She has won five awards for her work, including Household Money Journalist of the year. Read more