CGT Tax Rates UK

Understanding Capital Gains Tax (CGT) Rates in the UK: A Comprehensive Guide

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, CGT is a significant consideration for individuals and businesses alike, as it can impact the net proceeds from the sale of assets such as property, shares, and other investments. This blog will provide a detailed overview of CGT rates in the UK, including how they are calculated, the different rates that apply, and strategies to minimize your CGT liability.

What is Capital Gains Tax?

Capital Gains Tax is a tax on the gain you make when you sell, give away, or otherwise dispose of an asset. The tax is not on the total amount you receive from the sale, but rather on the gain you make. For example, if you buy a painting for £5,000 and later sell it for £15,000, you have made a gain of £10,000, and this gain is subject to CGT.

Assets Subject to CGT

CGT applies to a wide range of assets, including:

Property: This includes residential property (other than your main home), buy-to-let properties, and commercial property.
Shares and Investments: Stocks, bonds, and other investments held outside of an ISA or pension.
Business Assets: Assets used in a business, such as machinery, equipment, and goodwill.
Personal Possessions: Items worth £6,000 or more, such as art, antiques, and jewelry.

Exemptions and Reliefs

Not all assets are subject to CGT. Some assets are exempt, including:

Your Main Home: Generally, you do not have to pay CGT when you sell your main residence, thanks to Private Residence Relief.
ISAs and PEPs: Gains on investments held within an Individual Savings Account (ISA) or Personal Equity Plan (PEP) are exempt from CGT.
Gifts to Spouses or Civil Partners: Transfers of assets between spouses or civil partners are usually exempt from CGT.
Certain Types of Investments: Some government bonds and certain types of shares may be exempt from CGT.

How is Capital Gains Tax Calculated?

To calculate your CGT liability, you need to determine your taxable gain. This is done by subtracting the following from the sale price of the asset:

The Original Purchase Price: This is the amount you paid for the asset.
Allowable Costs: These include costs associated with buying, selling, or improving the asset, such as legal fees, stamp duty, and renovation costs.
Annual Exempt Amount: Each tax year, you are entitled to a tax-free allowance known as the Annual Exempt Amount. For the 2023/24 tax year, this is £6,000 for individuals and £3,000 for trustees.

The resulting figure is your taxable gain, which is then subject to CGT at the applicable rate.

Example Calculation

Let’s say you bought a second home for £200,000 and spent £20,000 on renovations. You later sold the property for £300,000. The calculation of your taxable gain would be as follows:

Sale Price: £300,000
Purchase Price: £200,000
Allowable Costs: £20,000
Total Deductions: £220,000
Gain: £300,000 – £220,000 = £80,000
Annual Exempt Amount: £6,000
Taxable Gain: £80,000 – £6,000 = £74,000

This £74,000 would then be subject to CGT at the applicable rate.

CGT Rates in the UK

The rate of CGT you pay depends on two main factors:

Your Income Tax Band: Whether you are a basic rate taxpayer or a higher/additional rate taxpayer.
The Type of Asset Sold: Different rates apply to residential property and other assets.

CGT Rates for 2023/24

For the 2023/24 tax year, the CGT rates are as follows:

Residential Property

Basic Rate Taxpayers: 18%
Higher and Additional Rate Taxpayers: 28%

Other Assets (e.g., shares, investments, personal possessions)

Basic Rate Taxpayers: 10%
Higher and Additional Rate Taxpayers: 20%

Determining Your Income Tax Band

To determine which CGT rate applies to you, you need to know your income tax band. This is based on your total taxable income, which includes:

Earned Income: Salary, wages, and pensions.
Unearned Income: Interest, dividends, and rental income.
Capital Gains: The taxable gain from the sale of assets.

Your income tax band is determined by adding your taxable income to your taxable gain. If the total falls within the basic rate band, you will pay CGT at the lower rate. If it exceeds the basic rate band, you will pay CGT at the higher rate on the amount above the threshold.

Basic Rate Band for 2023/24

England, Wales, and Northern Ireland: £12,570 to £50,270
Scotland: £12,570 to £43,662

Higher Rate Band for 2023/24

England, Wales, and Northern Ireland: Above £50,270
Scotland: Above £43,662

Additional Rate Band for 2023/24

England, Wales, and Northern Ireland: Above £125,140
Scotland: Above £125,140

Example: Calculating CGT Based on Income Tax Band

Let’s say you are a basic rate taxpayer in England with a taxable income of £40,000. You sell some shares and make a taxable gain of £20,000. Your total taxable income and gain would be £60,000, which exceeds the basic rate band of £50,270. Therefore, you would pay CGT at the following rates:

Basic Rate Band: £50,270 – £40,000 = £10,270 taxed at 10% = £1,027
Higher Rate Band: £20,000 – £10,270 = £9,730 taxed at 20% = £1,946
Total CGT: £1,027 + £1,946 = £2,973

Special CGT Rules for Residential Property

Residential property is subject to higher CGT rates than other assets. Additionally, there are special rules that apply to the sale of residential property, including:

Private Residence Relief (PRR)

If you sell your main home, you may be eligible for Private Residence Relief, which exempts you from paying CGT on the sale. To qualify, the property must have been your main residence for the entire time you owned it. If you have lived in the property for only part of the time you owned it, you may be eligible for partial relief.

Lettings Relief

If you have let out part of your main home, you may be eligible for Lettings Relief, which can reduce your CGT liability. However, from April 2020, Lettings Relief is only available if you are in shared occupancy with the tenant.

Reporting and Paying CGT on Residential Property

If you sell a residential property in the UK, you must report the sale and pay any CGT due within 60 days of the completion date. This is done through the UK government’s Capital Gains Tax on UK Property service.

CGT on Shares and Investments

Shares and investments are subject to lower CGT rates than residential property. However, there are several considerations to keep in mind when calculating CGT on shares and investments:

Bed and Breakfasting Rules

The “bed and breakfasting” rule prevents you from selling shares and then buying them back immediately to realize a gain or loss for tax purposes. If you sell shares and buy them back within 30 days, the sale and purchase are matched, and the gain or loss is calculated accordingly.

Share Identification Rules

When you sell shares, you need to identify which shares you are selling to calculate the gain or loss. The default rule is the “First In, First Out” (FIFO) rule, which assumes that the first shares you bought are the first ones you sell. However, you can use other methods, such as the “Specific Identification” method, if you keep adequate records.

Tax-Advantaged Accounts

Investments held within tax-advantaged accounts, such as ISAs and pensions, are exempt from CGT. Therefore, it is often beneficial to hold investments within these accounts to minimize your CGT liability.

CGT on Business Assets

If you sell business assets, you may be eligible for Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief), which reduces the CGT rate to 10% on qualifying gains. To qualify, you must have owned the business for at least two years and meet other specific criteria.

Business Asset Disposal Relief (BADR)

BADR applies to the sale of:

All or part of a business: This includes sole traders, partnerships, and limited companies.
Assets used in a business: This includes machinery, equipment, and goodwill.
Shares in a company: If you own at least 5% of the shares and voting rights in a trading company.

The lifetime limit for BADR is £1 million of gains, meaning you can claim relief on up to £1 million of gains over your lifetime.

Investors’ Relief

Investors’ Relief is another CGT relief that applies to gains on shares in unlisted trading companies. The relief reduces the CGT rate to 10% on gains of up to £10 million. To qualify, you must have held the shares for at least three years and meet other specific criteria.

Strategies to Minimize Your CGT Liability

There are several strategies you can use to minimize your CGT liability, including:

1. Utilize Your Annual Exempt Amount

Each tax year, you are entitled to a tax-free allowance known as the Annual Exempt Amount. For the 2023/24 tax year, this is £6,000 for individuals and £3,000 for trustees. By spreading the sale of assets over multiple tax years, you can take advantage of this allowance and reduce your overall CGT liability.

2. Transfer Assets to a Spouse or Civil Partner

Transfers of assets between spouses or civil partners are usually exempt from CGT. By transferring assets to a spouse or civil partner who is in a lower tax band, you can reduce the overall CGT liability when the asset is sold.

3. Invest in Tax-Advantaged Accounts

Investments held within tax-advantaged accounts, such as ISAs and pensions, are exempt from CGT. By holding investments within these accounts, you can shield your gains from CGT.

4. Claim Reliefs and Exemptions

There are several reliefs and exemptions available that can reduce your CGT liability, including Private Residence Relief, Lettings Relief, Business Asset Disposal Relief, and Investors’ Relief. Make sure to explore these options and claim any reliefs or exemptions you are eligible for.

5. Offset Losses Against Gains

If you have made a loss on the sale of an asset, you can offset this loss against any gains you have made in the same tax year. If your losses exceed your gains, you can carry forward the unused losses to offset against future gains.

6. Timing of Sales

The timing of asset sales can have a significant impact on your CGT liability. By carefully planning the timing of sales, you can take advantage of lower tax rates, utilize your Annual Exempt Amount, and offset losses against gains.

Reporting and Paying CGT

If you have made a taxable gain, you are required to report it to HM Revenue and Customs (HMRC) and pay any CGT due. The process for reporting and paying CGT depends on the type of asset sold and whether you are required to file a Self Assessment tax return.

Reporting CGT on Residential Property

Reporting CGT on Other Assets

If you sell other assets, such as shares or personal possessions, you may need to report the gain and pay any CGT due through your Self Assessment tax return. The deadline for filing a Self Assessment tax return and paying any CGT due is January 31st following the end of the tax year.

Payment on Account

If you are required to pay CGT on the sale of residential property, you may also be required to make a payment on account. This is an advance payment towards your overall tax liability for the year. The payment on account is due by January 31st following the end of the tax year.

Conclusion

Capital Gains Tax is an important consideration for anyone who sells or disposes of an asset that has increased in value. Understanding the CGT rates, how they are calculated, and the various reliefs and exemptions available can help you minimize your tax liability and maximize your net proceeds from the sale of assets.

By utilizing strategies such as spreading the sale of assets over multiple tax years, transferring assets to a spouse or civil partner, investing in tax-advantaged accounts, and claiming reliefs and exemptions, you can reduce your CGT liability and keep more of your hard-earned money.

Remember to keep accurate records of your transactions, including the purchase price, allowable costs, and sale price, as this will make it easier to calculate your taxable gain and report it to HMRC. If you are unsure about your CGT liability or how to report it, consider seeking advice from a tax professional or financial advisor.

With careful planning and a good understanding of the rules, you can navigate the complexities of Capital Gains Tax and make informed decisions about the sale of your assets.