Capital gains tax is a tax charged on the profit (ie the gain) you make when you ‘dispose of’ an asset that has increased in value. The amount you pay depends on your income and the value of the asset.
What is capital gains tax?
What is a disposal?
'Disposing' of an asset includes:
- selling the asset
- giving the asset away as a gift or transferring it to someone else
- swapping the asset for something else
- receiving compensation for the asset, eg if it's been lost or destroyed
What do you pay capital gains tax on?
- Most personal possessions worth £6,000 or more (excluding your car).
- Property that isn't your main home.
- Your main home if you've let it out or using it for business.
- Business assets, eg land, buildings, plant and machinery.
These are known as chargeable assets.
You do not pay capital gains tax on:
- shares if they're in an ISA
- UK Government gilts or premium bonds
- betting or lottery winnings
You only need to pay capital gains tax on total gains above the annual tax free allowance (called the Annual Exempt Amount). This is currently £12,300. Depending on the asset, you may also be able to rely upon a relief to reduce your tax bill, for example:
- roll over (replacement of business assets) relief - there are special rules for ‘wasting assets’ (ie assets with a life of less than 50 years) which are normally exempt from capital gains tax
- entrepreneurs' relief - you may be able to pay less capital gains tax when you dispose of all or part of your business
- private residence relief - for more information on when this applies, see the government’s guidance
For more information on the types of CGT relief available, see the government’s guidance.
Tax on gifts
You don't have to pay capital gains tax on assets you give or sell to your spouse or civil partner, unless you:
- separated or didn't live together at all during that tax year
- gave them the goods for their business to sell on
Your spouse/civil partner will have to pay capital gains tax on the gain if they later dispose of the asset.
You don't have to pay capital gains tax on assets you give away to charity.
You may have to pay if you sell an asset to charity for both:
more than you paid for it, and
less than market value
Note that you should work out your gain using the amount the charity pays you, rather than the actual value of the asset.
How much tax do you need to pay?
You only pay CGT if your taxable gains are above your annual capital gains tax allowance:
1. Work out total taxable gains
Work out the gain for each asset disposed of in the tax year. Your gain is the difference between what you paid for the asset and the amount you got when you sold (or ‘disposed of’) it.
2. Add together the gains from each asset
The total amount will be your total taxable gain.
3. Deduct any allowable losses
If, when ‘disposing’ of the asset, you find that you make a loss, you can report that loss to HMRC to reduce your total taxable gains. When you report a loss, the amount is deducted from the gains you made in the same tax year.
If after having deducted allowable losses, you find your total taxable gain is still above the tax-free allowance, you can deduct unused losses from previous tax years. If they reduce your gain to the tax-free allowance, you can carry forward the remaining losses to a future tax year.
You do not have to pay any tax if your total taxable gains are under your capital gains tax allowance, however, you'll still have to tell HMRC if:
- you disposed of chargeable assets with an overall worth of more than 4 times the Capital Gains Tax allowance (£49,200 for the 2021 to 2022 tax year)
- you have losses that you want to claim
You can report this in your tax return.
4. Apply the tax rate
Basic rate income taxpayers are liable for capital gains tax at 10%, while those on higher rates of income pay 20%. For gains made on the sale of residential property (ie a second home, or a buy-to-let investment), basic rate taxpayers are liable for capital gains tax at 18% and higher rate taxpayers at 28%.
You can use the government’s Capital Gains Tax tool to help you work out how much CGT you’ll have to pay.
How can you report and pay capital gains tax?
You can report your gain and pay capital gains tax straight away by using GOV.UK's real-time Capital Gains Tax service if you’re a UK resident.
- Kate bought a flat for £200,000 and sold (ie ‘disposed’ of) it for £250,000. She has made a profit of £50,000.
- The direct costs of buying and selling the property can be deducted when calculating Kate's capital gains tax:
£3,000 (selling costs, eg estate agent fees, advertising fees, etc) -
£3,000 (buying costs, eg survey fees, stamp duty, etc)
= £44,000 (the net gain or 'Chargeable Gain') -
£12,300 (tax allowance) =
£31,700 (Taxable Gain).
Let's say that the flat was an investment property - a buy-to-let. We have to calculate Kate’s capital gains tax bill by multiplying her taxable gain by the correct tax rate; either 18% or 28% or a combination of both.
Which rate we use depends on how much income she has:
- higher rate taxpayer: if Kate has a total income of more than £50,270 (ie between £50,271 and £150,000) in the 2021/22 tax year, she will be a higher-rate taxpayer. This means her entire taxable gain will be taxed at 28%: £31,700 x 28% = £8,876
- basic rate taxpayer: if Kate’s income is less than £50,270 (ie between £12,571 and £50,270), she will be a basic-rate taxpayer and some or all of her gain will be taxed at 18%. For example, if she has income of £30,000, this means £20,270 of her basic-rate band will still be available (£50,270 - £30,000). Consequently, the first £20,270 of her capital gain will be taxed at 18% and the rest at 28%:
£20,270 x 18% = £3,648.6 +
£11,430 x 28% = £3,200.4
Total tax = £6,849
If Kate has no taxable income for the year, or has income of less than her personal allowance (£12,570), her entire taxable gain will be covered by her basic-rate tax band and will be taxed at 18%: £31,700 x 18% = £5,706.