Capital Gains Tax: What You Need to Know
When you sell an asset such as property, stocks, or other investments at a profit, understanding capital gains tax (CGT) is crucial. CGT can significantly impact your financial outcomes, and knowing how it works can help you manage your tax liabilities more effectively. Whether you're an individual, an investor, or a business, staying informed about CGT is essential for smart financial planning. In this blog, we break down the key aspects of capital gains tax, helping you navigate its complexities.
What is Capital Gains Tax?
Capital gains tax is a tax on the profit made when you sell or dispose of an asset that has increased in value. The tax is applied to the “gain,” which is the difference between what you paid for the asset and what you sold it for. In the UK, CGT is typically applicable to investments, second properties, shares, and personal possessions valued over £6,000 (excluding cars).
However, not all asset sales are subject to CGT. For instance, selling your primary residence may be exempt if it meets specific criteria under the “Private Residence Relief.” Additionally, some gains are tax-free, such as those from selling ISAs or UK government bonds. Understanding these exemptions can help reduce your tax burden and ensure you don’t pay more than necessary.
How is Capital Gains Tax Calculated?
The calculation of capital gains tax involves determining the gain made from the sale of an asset. This is done by subtracting the acquisition cost (the price you originally paid for the asset) from the sale price. Once the gain is determined, any available tax-free allowances, such as the annual CGT allowance (currently £6,000 in the UK for the 2023/24 tax year), are deducted from the gain.
For example:
If you bought shares for £10,000 and later sold them for £15,000, your gain is £5,000. Since this is below your CGT allowance, you wouldn't owe any tax. However, if your gain exceeds the allowance, you would only pay tax on the amount above the £6,000 threshold.
Tax Rates for Capital Gains:
Unlike in some countries, the UK doesn’t differentiate between short-term and long-term gains. Instead, the CGT rate depends on your overall income:
- Basic Rate Taxpayers (income up to £50,270): 10% on gains
- Higher and Additional Rate Taxpayers (income above £50,270): 20% on gains
For gains from the sale of residential property (other than your primary residence), the rates are higher:
- Basic Rate Taxpayers: 18%
- Higher Rate Taxpayers: 28%
Additionally, certain business owners may qualify for a reduced CGT rate of 10% when selling their business or part of it, under special tax relief schemes such as Business Asset Disposal Relief.
How Howard & Over Can Help
Navigating capital gains tax can be complicated, especially when dealing with high-value assets, property transactions, or business sales. At Howard & Over, we understand that tax issues can feel overwhelming, and our team is here to provide expert guidance tailored to your unique situation. However, please note that we do not give tax advice. If you have any specific tax questions or require detailed tax advice, it is important to consult with a qualified tax advisor. Our role is to provide general guidance on your financial matters, and we strongly recommend seeking professional tax advice for any detailed concerns about your CGT liabilities.
Please don’t hesitate to contact us at Howard & Over.
