CGT is the tax you pay on profit gained when you sell (or ‘dispose of’) an asset that has increased in value.
It is important to remember that it is the gain which is taxed, not the amount you receive. You might pay CGT on the gain when you sell (or ‘dispose of’) personal possessions worth over £6,000 (apart from your car), secondary property (property which is not your home), your main home (if you have let it out, used it for business, or it is very large), any shares which are not an ISA or PEP, and business assets. These are often referred to as ‘chargeable’ assets.
If you dispose of an asset which you jointly own with someone else, you must pay CGT on your share of the gain.
Planning for CGT brings about certain benefits for tax-efficient wrappers. For instance, you can make the most of Individual Savings Accounts (ISAs), or even your pensions (including Self-Invested Personal Pension, or SIPP). Both accounts will protect your investments from CGT.
Transfers between spouses and civil partners are usually tax-free. You can therefore work as a couple to better manage CGT liabilities. And, if they are in a lower tax bracket,don’t work, or haven’t fully used their CGT allowance,transferring investments to your spouse or civil partner can help to reduce a CGT bill.
You can reduce the risk of building large and unrealised capital gain by using the annual CGT allowance to sell part of a holding without incurring any tax, and then buy it back. Though you must wait 30 days before buying back a holding.
What are the potential risks?
As with other taxations, CGT can change according to the government. This is the same for all government taxations.
The plan may include things like using your (and your spouse’s) tax-free annual exemption (currently at £6,000 each), and considering tax-free transfers of assets (for example, a ‘Bed & Spouse’). We may also try a ‘Bed & ISA’ and ‘Bed & SIPP’ by selling assets to realise gains and crystallise losses. If any of your investments or assets are of negligible value, we may consider making a claim for the loss to reduce the current year’s gains.
In addition to this, EIS investments can be used to defer or reduce CGT and provide additional IHT benefits. And capital gains that are rolled into Seed EIS shares qualify for a permanent 50% CGT exemption. This would only be considered if you understood and were happy with the extra investment risk and tying capital up for three years.
For the 2023 to 2024 tax year the allowance is £6,000, which leaves £6,600 to pay tax on. This tax is charged at 10%.
If you inherit a property in the UK, CGT will only be payable if you decide to sell it and make a profit from the sale. It will be payable on any amount over the value of the property at the time you inherited it. Allowable deductions may still apply. Always speak with a Chartered Financial Planner about the opportunities and risks.
In the Chancellor of the Exchequer’s Autumn Statement in November 2022, it was announced that Capital Gains Tax allowances would be reduced from April 2023 (this is the current £6,000), and then further reduced from April 2024 to £3,000.
No – CGT is paid only on the profit made on the sale of a capital asset, while Income Tax is paid on earned income.
The amount of Capital Gains Tax you pay depends on what type of asset you have disposed of, and the tax band the gain from it falls into when added to your taxable income.
For basic rate taxpayers, CGT is often charged at either 10% or 18%.
For higher or additional rate taxpayers, the gains from residential property currently sit at 28%, while gains from other chargeable assets are currently taxed at 20%.
To reduce your Capital Gains Tax bill, your financial planner may use several tax-efficiency options.
For instance, you may make use of your CGT allowance, give funds and assets to your spouse or civil partner, deduct your costs and losses, use your ISA allowance, donate to charity, use carryforward allowances, and more.
You pay Capital Gains Tax on the profit gained when you dispose of assets. It is important to remember that the gain is taxed, not the amount you receive – this means the increase in value is taxed.
When you sell or ‘dispose’ of an asset that has increased in value. CGT is paid on the increase in value, not the amount you receive.
You usually do not pay Capital Gains Tax when you sell your main (or only) home. This is a result of private residence relief.
You do pay CGT, however, if you are selling a buy-to-let property or second home.
Book a video call
Interested in becoming a client? Book a 30-minute video call and we'll answer your questions.
News and insights straight to your inbox. Subscribe to our newsletter.
You are now leaving First Wealth's website
First Wealth (London) Limited does not endorse the linked website or any of its contents, and is not responsible for the accuracy of the information contained within it.