What Is Capital Gains Tax?

Capital Gains Tax is the tax you pay on the profit you make when you sell an asset. These assets can include stocks, property, or valuable items. The taxable gain is the difference between the sale proceeds and the original purchase price.

Each person has a tax-free allowance for capital gains. For the 2024-2025 tax year, this amount is £3,000. If your gains exceed this limit, you will need to pay tax on the excess. Understanding when and how CGT applies helps ensure you comply with tax laws while maximising your allowances.

How CGT Is Calculated

To determine your CGT liability, start by calculating your total gains. This is done by adding together all your gains from different assets sold in the tax year. Once you have this total, subtract your annual allowance.

Next, your taxable gain will be added to your taxable income for the tax year. The rate of CGT you pay depends on your income tax bracket. Basic-rate taxpayers generally pay 10%, while higher-rate taxpayers pay 20% on gains. If you sold residential property, rates can be higher, reaching up to 28%.

Differences Between Income Tax and CGT

Income tax and Capital Gains Tax are distinct taxes with different rules and rates. Income tax is charged on earnings, such as salaries or profits from a business. In contrast, CGT is applied only to gains from the sale of assets.

Your income tax is based on your total earnings in a tax year, while CGT is based solely on the profits from asset sales. Non-domiciled individuals in the UK may use the remittance basis of taxation, affecting how gains are taxed. Unlike income tax, which may have various allowances and credits, CGT relies mainly on the annual tax-free allowance.

Annual Exempt Amount and Allowances

Understanding the allowances available under Capital Gains Tax (CGT) can help you minimise your tax burden. The annual exempt amount allows you to make some gains tax-free. Additionally, there are other allowances, such as those related to ISAs and pension contributions, that can help reduce your taxable gains.

CGT Allowance and the Annual Exempt Amount

The annual exempt amount is a key feature of Capital Gains Tax. For individuals, this allowance allows you to make gains of up to £3,000 each tax year without paying any tax. If your gains exceed this amount, the excess will be taxed at the applicable CGT rates.

For trusts, the annual exempt amount is lower, set at £1,500. You should keep track of your gains each year to ensure you take advantage of this allowance. If you do not use the full exempt amount in one year, you cannot carry it forward to the next.

Understanding the CGT-free Allowance

The CGT-free allowance is crucial for effective tax planning. It applies to your total gains throughout the year. After deducting this allowance from your taxable gains, the remaining amount contributes to your taxable income.

When considering your gains, remember to factor in other reliefs or losses you may have. This can further reduce your taxable gains and help you stay within the tax-free threshold. Staying organised with records can improve your ability to reduce your tax bill.

ISA and Pension Contributions

Investing through an Individual Savings Account (ISA) or pension can offer tax benefits. Gains made within an ISA are completely CGT-free. This means you can grow your investments without worrying about tax on any profits.

Pension contributions also provide tax advantages. When you invest in a pension, you receive tax relief on your contributions. Any gains within the pension fund are typically free from CGT until you withdraw them. Maximising your ISA allowance and pension contributions can significantly reduce your taxable exposure.

Rates and Calculations

Understanding the current rates and how to calculate your taxable gains is vital for managing your Capital Gains Tax (CGT) bill. Knowing the difference between basic-rate and higher-rate taxpayers can help you plan effectively.

Current Capital Gains Tax Rates

For the tax year ending 5th April 2025, Capital Gains Tax rates vary based on the type of asset and your income level. The rates are as follows:

• Residential Property:
  • 18% for basic-rate taxpayers
  • 24% for higher-rate taxpayers
• Other Assets:
  • 10% for basic-rate taxpayers
  • 20% for higher-rate taxpayers

These rates apply once your taxable gains exceed the annual exempt amount, which is £3,000 for the 2024-2025 tax year. It’s important to determine whether your gains apply to residential or other assets as this affects your tax rate.

Basic-Rate and Higher-Rate Taxpayers

If your total taxable income, including your capital gains, stays within the basic-rate threshold, you will pay the lower CGT rates. For the 2024-2025 tax year, the basic-rate threshold is £50,270.

As a basic-rate taxpayer, you will pay:

• 18% on gains from residential properties.
• 10% on gains from other assets.

If your income exceeds this threshold, you fall into the higher-rate taxpayer category. You’ll pay:

• 24% on residential property gains.
• 20% on other asset gains.

Understanding where you stand in terms of income will help you calculate your CGT more accurately.

Calculating Taxable Gains

To calculate your taxable gains, start with the total amount you received from selling your asset and subtract what you paid for it, including purchasing costs.

1. Total Sale Amount: This is the price you sold your asset for.
2. Purchase Price: This includes the original price plus any associated costs, like improvements and fees.

Then, subtract the annual exempt amount of £3,000. If your gains exceed this, the amount left is your taxable gain.

For example, if you sold an asset for £12,600 and bought it for £9,000:

• Total gain = £12,600 – £9,000 = £3,600
• Taxable gain = £3,600 – £3,000 = £600

This means you only pay tax on £600 of your gain. Understanding these calculations can significantly reduce your tax bill.

Property and CGT

When dealing with property, understanding Capital Gains Tax (CGT) is crucial. This tax can significantly impact your profits when selling residential properties, second homes, or investment properties. You need to be aware of the rates and allowances that apply to each type of property ownership.

Residential Property and CGT

If you sell your primary home, you may qualify for Private Residence Relief, which can exempt you from CGT on gains made during the time you lived there. The capital gains tax-free allowance is currently set at £3,000 for the 2024-25 tax year.

To calculate your gain, take the selling price of your property and subtract the purchase price. If you made improvements to the property, you can also include those costs. If your total gains exceed your tax-free allowance, the excess will be taxed at a rate of 18% or 28%, depending on your overall taxable income.

Second Homes and Investment Properties

For second homes and investment properties, CGT applies to any gains above the tax-free allowance. If you own a second home, it might not qualify for Private Residence Relief, so you will likely pay tax on the entire gain.

The capital gains tax rates for property are higher than for other assets. Basic rate taxpayers generally pay 18%, while higher rate taxpayers face a rate of 28%. When calculating your gain, consider all associated costs like stamp duty and other transaction fees. Maintaining proper records is essential for accurate calculations.

Non-residents and UK Property

Non-residents selling UK property also face CGT. As of April 2015, they must pay tax on any gains made from selling UK residential property. You are liable for CGT on the profits above the allowance, just like residents.

The tax rules for non-residents are complex. If the property was sold at a gain, you must report this to HMRC within 30 days of the sale. Non-residents can also benefit from the £3,000 allowance. It is important to seek professional advice to ensure compliance and to optimise your tax situation.

Shares and Securities

Investing in shares and securities can offer significant financial benefits, but it’s essential to understand how Capital Gains Tax (CGT) applies. You need to know how to calculate CGT on your share sales, along with strategic options like the Bed and ISA approach and the benefits of the Enterprise Investment Scheme.

Calculating CGT on Shares

When you sell shares, you incur capital gains if you sell them for more than you bought them. To calculate your CGT:

1. Determine the Sale Price: This is the amount you received from selling the shares.
2. Find the Purchase Price: This is what you initially paid for them.
3. Subtract Costs: Deduct any transaction fees or costs related to buying and selling.

For the 2024-2025 tax year, the annual CGT allowance is £3,000. If your gains exceed this allowance, you must pay tax on the excess amount. The rate you pay depends on your total taxable income, falling between 10% and 20% for most individuals.

Bed and ISA Strategy

The Bed and ISA strategy allows you to minimise CGT. It involves selling shares in your general investment account and immediately repurchasing them within an Individual Savings Account (ISA). Here’s how it works:

• Sell Your Shares: You sell shares that have grown in value.
• Use Your Allowance: The gains may fall under the CGT allowance, as you no longer hold them outside an ISA.
• Repurchase in an ISA: You then buy the shares back within your ISA, making future gains tax-free.

This strategy helps you retain your investment while reducing CGT liability. It is vital to understand market timing to avoid losses during the transition.

Enterprise Investment Scheme

The Enterprise Investment Scheme (EIS) encourages investment in smaller, high-risk companies. Investing through EIS offers several tax benefits:

• Income Tax Relief: You can claim up to 30% relief on your investments.
• No CGT on Profits: If you hold your shares for at least three years, any profits are exempt from CGT.
• Loss Relief: If your investment loses value, you can offset losses against your income tax.

This scheme is beneficial for investors looking to support new enterprises while also seeking to minimise their tax liabilities. Make sure you understand the risks involved, as EIS investments can be volatile.

Optimising Tax Liability

Managing your capital gains tax liability is crucial for maximising your returns on investments. You can use various strategies to lower your tax bills and make informed financial decisions. Key methods include utilising available reliefs and exemptions, transferring assets between spouses, and timing your asset disposals wisely.

Using Reliefs and Exemptions

Reliefs and exemptions can significantly reduce your capital gains tax bill. One of the most notable is Business Asset Disposal Relief, which allows you to pay a reduced rate of tax when selling qualifying business assets. The Enterprise Investment Scheme offers tax reliefs for individuals investing in high-risk companies.

You can also benefit from the annual tax-free allowance, which lets you make gains up to a certain limit without being taxed. In 2025, this allowance is important for personal financial planning. It’s essential to keep track of your gains and losses each year, so you can fully utilise your reliefs.

Transferring Assets Between Spouses

Transferring assets between spouses can be a smart way to optimise tax liability. This method allows you to transfer ownership of assets without incurring capital gains tax. Spouses can share their allowances, effectively doubling the amount of tax-free gains you can make before being taxed.

If one spouse is in a lower income tax bracket, transferring assets can help minimise the overall tax bill. This strategy is particularly useful for family businesses or investment properties where changes in ownership are common. Consider this method as part of your broader financial planning.

Timing of Asset Disposal

The timing of when you sell your assets can have a big impact on your capital gains tax liability. By choosing to hold onto an asset for at least a year, you might pay a lower tax rate on longer-term gains compared to short-term sales.

Monitoring market conditions is also key. If you sell an asset when its value is high, you could face a larger tax bill. On the other hand, selling during a downturn may help mitigate losses. Plan your asset disposals carefully to align with your financial goals and tax strategy.

Getting Professional Advice

Seeking professional advice can be an important step in managing your Capital Gains Tax (CGT) obligations effectively. It helps ensure that you make informed investment decisions and plan your finances wisely. Understanding when to seek help and how to choose the right advisor can significantly influence your tax bill.

When to Seek Professional Advice

You should consider seeking professional advice if your financial situation becomes complex. This includes cases where you have multiple investments, such as stocks or property. A tax advisor can help you understand how these assets might impact your total income and CGT liability.

If you are dealing with significant financial changes, like inheritance or selling a family home, professional guidance is beneficial. A knowledgeable advisor can identify available allowances and deductions that might lower your tax bill. Furthermore, if you are uncertain about how to complete forms like the SA100 or SA108, it’s best to consult a professional to avoid potential mistakes.

Selecting a Tax Advisor

Choosing the right tax advisor is crucial for effective financial planning. Look for someone who specialises in Capital Gains Tax and has experience with cases similar to yours. Check their qualifications and read reviews or testimonials from previous clients.

When interviewing a potential advisor, ask about their approach to managing CGT and previous success in minimising tax bills. Transparency in fees is also important; ensure you understand how they charge and what services are included. A good advisor will take the time to explain your tax situation clearly and offer tailored strategies for your needs.

Trust Cigma Accounting’s Wimbledon accountants for reliable bookkeeping services. Secure your consultation now for expert financial support. Reach out today!