Capital Gains Tax: What do you need to know?

Don’t fall into the trap of paying over the odds when it comes to Capital Gains Tax. Read our latest article to find out all you need to know about CGT, so that you avoid paying unnecessary tax on your profits.

Overview:

  • Capital Gains Tax (CGT) is charged on the gains (profits) when you sell or give away an asset that has gone up in value.
  • In addition to using your tax-free allowance of £12,300, there are many ways of minimising your CGT bill – whether that be giving assets to your partner or increasing your pension contributions.
  • The rules surrounding CGT are complex, meaning it’s wise to speak to a financial adviser about it, so that you can limit the amount you have to pay.

Capital Gains Tax (CGT) can be perplexing, meaning that some people end up paying it unnecessarily or get caught out and face fines due to incorrect disclosures.

With this in mind, we’ve put together some FAQs about CGT and how financial planning can help.

What is Capital Gains Tax?

CGT is a tax that’s charged when you sell or dispose of something – an investment, for example – that has gone up in value. Rather than the tax being charged on the total sale price, it’s levied on the gains (profits) that you made during your ownership of said asset.

For instance, if you were to buy an antique ring for £10,000 and sell it for £15,000, your capital gain would be £5,000.

What is CGT charged on?

The sale proceeds of practically any personal possession can be subject to CGT, such as shares and investments, buy-to-let properties, holiday homes, jewellery, fine wine, paintings, coins and stamps.

However, there are a number of exceptions, including:

  • Shares or investments held within a pension or ISA – these wrappers shelter their contents from tax
  • Your primary home
  • Your car
  • Assets you leave to charity. 

Do I have a tax-free allowance for CGT?

Yes – in the current tax year (2021/22), you can benefit from £12,300 of gains before you need to pay CGT. This might be referred to as your ‘annual exempt amount’. The government has frozen this allowance until 2026.

How much CGT will I have to pay?

The amount all depends on your income.

If you pay the basic rate of tax and the profits you’ve made are still within the basic-rate band, you’ll pay 10% CGT – that is, unless you’re selling residential property, where the rate rises to 18%.

If you pay higher-rate tax, or your profits combined with your income take you into the higher rate, you’ll pay 20% for most assets and 28% for residential property.

How can I reduce my CGT bill?

There are many ways to legally reduce the amount of CGT that you pay. But what works best for you will depend on your personal circumstances. What’s more, it may need to be managed over time – hence why financial advice is so crucial.

  • Give assets to your partner or spouse – most transfers of capital between civil partners or spouses are CGT-free. Transferring assets to them means you’ll be able to use both of your annual allowances.
  • Increase your pension contributions – the amount of CGT you pay is linked to your rate of Income Tax. Upping your pension contributions will mean you can reduce your income for tax purposes and therefore the rate of CGT that you’re charged.
  • Use your annual allowance – you can’t carry forward any unused allowance from the previous year. With careful forward planning and selling gains gradually over a number of years, you can keep them within the annual allowance.
  • Maintain your assets – for example, if you make improvements to a holiday home or restore a valuable painting, you can deduct those costs for tax purposes.

What does ‘bed and ISA’ mean?

This is essentially the process of selling some investments and repurchasing them within a tax-efficient ISA wrapper.

This is a great option to use up your ISA allowance and shelter the investments from CGT. Not only that, but it can also prove practical if you need to sell gains up to the CGT annual allowance but don’t actually want to sell the investment.

What happens if I make a loss on an asset?

It goes without saying that assets don’t always increase in value.

If you find that you’ve made a profit when selling one item and a loss when selling another, you can deduct the loss from your gain when calculating how much tax you need to pay. Furthermore, you’re able to carry forward any losses that haven’t been used, so as to offset gains for up to four years.

It might be that you don’t owe any CGT – if that’s the case, it’s nevertheless a good idea to declare any losses on your tax return. This will make life easier should you wish to offset gains against them at a later date.

What would happen if I were to sell my business?

In this scenario, you may qualify for Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) if you’re a sole trader or business partner and have owned the business for a minimum of two years. The relief reduces the rate of CGT on disposals of certain business assets from 20% to 10%.

How do I declare capital gains?

If you’ve made gains of more than £12,300 when selling assets, you must declare this to HMRC. How and when you do so all depends on the asset or assets you sold.

If you sell a property and it completed after 27 October 2021, you have 60 days maximum to report your gain and pay the tax due – set up a ‘Capital Gains Tax on Property’ account on the government website to do this.

You can report other gains and pay the tax immediately using the real-time service on the government website, or you can report it in a self-assessment tax return in the tax year following the sale of the assets.

HMRC will let you know how much CGT you owe, how to pay it and when the deadline is.

If you have any further questions about the ins and outs of CGT, don’t hesitate to get in touch.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

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