Capital gains tax (CGT) applies to gains you make on various assets when you sell or ‘dispose of’ them. If you’re wondering about the ins and outs of how CGT affects your assets, this guide is for you.
Whether you’re thinking about selling a property or a valuable work of art, you need a firm grasp of CGT. If you do trigger a charge, you’ll need to report it to HMRC and pay the bill, or you could face fines.
Overview of capital gains tax
You usually need to pay CGT after selling or disposing of an asset that has appreciated in value.
It’s crucial to understand that the ‘gain’ or profit is subjected to tax, not the overall selling price.
For instance, if you purchase an antique for £10,000 and later sell it for £50,000, you’ll be taxed on the £40,000 gain instead of the sale price itself.
Current CGT allowances
You must only pay CGT on any gains exceeding your tax-free allowance. This is also known as your Annual Exempt Amount (AEA).
While this threshold was at £12,300 in 2022/23, this was cut to £6,000 for the 2023/24 tax year. In April 2024, taxpayers will see a further reduction of the allowance to just £3,000.
CGT rates
You’ll need to pay a different rate of tax depending on your income tax band and what kind of asset you’re selling.
Individuals with annual incomes under £50,270 will need to pay 10% on gains from most chargeable assets. However, they’ll face a higher rate of 18% when selling residential properties.
Meanwhile, those who earn more than this amount are subject to 20% CGT on most chargeable gains, with a higher rate of 28% when selling residential properties.
Assets that fall under CGT
CGT applies to a broad range of items known as ‘chargeable assets’. Here’s a closer look at some of the most common:
Personal possessions
Items such as artwork and jewellery could fall under CGT if valued at £6,000 or more. So if you’re considering selling a precious heirloom or an art piece that’s appreciated in value, you should consider the potential tax implications.
However, not all possessions are taxable; for instance, your car is almost always exempt from CGT.
Property
In the majority of cases, CGT will only apply to property that is not your primary residence.
That means you may trigger a CGT charge if you’re selling a holiday house, a rental property, or any real estate that isn’t your main home. If it’s your home you live in most of the time, you’ll usually qualify for Private Residence Relief.
However, even some primary residences can attract CGT if they’ve been rented out or used for business at any point. There are also additional rules for when you don’t occupy the house for periods of 12 months or when you separate from a spouse or civil partner.
It’s also crucial to note for those in joint ownership of an asset, whether it’s property or otherwise, only your proportion of the profit or ‘gain’ is subjected to CGT.
Shares
Investments in the stock market that are sold for profit are usually subject to CGT unless they were granted through schemes such as the Enterprise Management Incentive (EMI).
Business assets
If you’re a business owner, some assets related to a business, from machinery to intellectual property, can also be liable for CGT.
Whether you’re selling your business or restructuring, it’s essential to understand the tax consequences.
CGT exemptions
While CGT casts a wide net, certain exemptions and reliefs are in place to ensure fairness.
Main residence
As mentioned, your primary residence, the place you call home, generally gets relief from CGT.
Known as Private Residence Relief, this exemption ensures that the home you live in most of the time doesn’t attract CGT when sold – subject to certain conditions and rules.
Gifts
If you sell or gift an asset to your spouse’s civil partner, CGT will not be payable. Similarly, you are usually exempt when gifting an asset to charities.
This means that transferring assets to your partner or donating to a good cause can be valuable in more ways than one.
Tax-efficient investments
Any interest gained from ISAs or PEPs and certain share sales also falls outside the scope of CGT.
However, it’s important to remember that there are exceptions to every rule. Being proactive in understanding CGT rules and seeking professional advice can help ensure you stay compliant.
Capital losses and reliefs
Did you face a loss after the sale of an asset? If so, you may be eligible for tax relief. However, restrictions apply, so we’d recommend speaking to a specialist to make sure you make the most of your claim.
Wasting assets
Assets expected to have a brief lifespan are less likely to rake in profits.
Labelled ‘wasting assets’, this category includes items like cars, select machinery, and even some furniture types. As a result, these items remain largely untouched by CGT.
Summary
For the most part, CGT is relatively straightforward – but it certainly has its fair share of nuances.
With the allowance at £6,000 and halving again in 2024, now is a good time to consider any asset sales and whether it’s appropriate to sell sooner.
If you’re confused about some of the more complex aspects of CGT, consult a specialist.
We can help you understand how CGT is applied and advise you on whether any exemptions or reliefs are available.
If you have any questions about your assets and how CGT could affect your tax liability, don’t hesitate to get in touch. We’re always here to help.
