Capital gains tax (CGT) is a tax on the profit you make when you sell or dispose of an asset that has increased in value. In the UK, the capital gains tax rate depends on your income tax band and the type of asset being sold.
The capital gains tax rate can range from 10% for those paying the basic rate of income tax, to 28% for those in the higher or additional tax bands. However, it’s important to note that there are certain exemptions and allowances that can reduce the amount of tax you owe.
Who does Capital Gains Tax apply to?
Capital gains tax applies to anyone who sells or disposes of an asset that has increased in value. This includes individuals, partnerships, and companies. The tax is based on the gain made on the sale or disposal of the asset, rather than the amount of money received for the asset.
What assets are subject to Capital Gains Tax?
Capital gains tax applies to a wide range of assets, including:
- Property (excluding your primary residence).
- Shares and other investments.
- Business assets.
- Antiques and collectibles.
However, there are certain assets that are exempt from capital gains tax, such as:
- Your primary residence (subject to certain conditions).
- Your car.
- Personal possessions worth less than £6,000.
- Gifts to charity.
- Betting, lottery or pools winnings.
How much is the capital gains tax allowance?
Everyone is entitled to an annual tax-free allowance, known as the Annual Exempt Amount. This means that you can make gains up to this amount without paying any capital gains tax.
For the 2021/22 financial year, this allowance was £12,300. This falls to just £6,000 for the 2022/23 financial year, and will fall again to £3,000 in 2024.
If you are a business and plan on using the gains to reinvest in a new business asset, you can claim Business Asset Rollover Relief. Learn about the BASR scheme here.
How is capital gains tax calculated?
Add your total gains above the Annual Exempt Amount to the rest of your taxable income. If this total is under £50,270 (meaning you pay the basic income tax rate of 20%), your capital gains will be charged at 10%. This increases to 18% for residential property.
If the total exceeds £50,270, meaning you pay either the higher or additional rates of income tax, you will owe 20% of your capital gains in tax. This increases to 28% on residential property.
Minimising capital gains tax
There are several ways to reduce your capital gains tax bill when selling assets:
Offset losses against gains:
If you have made losses on the sale of other assets in the same tax year, you can offset these losses against your gains. If your total taxable gain is still above the tax-free allowance, you can deduct unused losses from previous tax years. If they reduce your gain to the tax-free allowance, you can carry forward the remaining losses to a future tax year.
Transfer assets to your spouse or civil partner:
If you transfer assets to your spouse or civil partner, you can do so without incurring any capital gains tax. This can be a useful strategy if your spouse or civil partner has a lower income tax bracket than you.
Time the sale of assets:
You can time the sale of your assets to make the most of your tax-free allowance and reduce your tax bill. For example, you could sell some assets in one tax year and some in the following tax year to make the most of your annual exemption.
Use tax-efficient investments:
There are certain investments, such as ISAs and Venture Capital Trusts, which are designed to be tax-efficient. By investing in these vehicles, you can reduce your capital gains tax bill.
Capital gains tax is an important consideration when selling assets. By using the strategies outlined above, you can reduce your tax bill and make the most of your tax-free allowances and exemptions. If you’re unsure about your tax liability, it’s always a good idea to seek professional advice.
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