Capital gains tax is a tax charged on the profit (i.e. 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, e.g. 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, e.g. 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 £11,300. 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’ (i.e. 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.
Tax on gifts
You don't have to pay capital gains tax on assets you give or sell to your husband, wife 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.
How much tax do you need to pay?
You only pay capital gains tax if your taxable gains are above your annual capital gains tax allowance:
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.
Add together the gains from each asset
The total amount will be your total taxable gain.
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 (£46,800 for the 2018 to 2019 tax year).
- you have losses that you want to claim.
You can report this in your tax return.
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 (i.e. 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%.
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 (i.e. ‘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, e.g. estate agent fees, advertising fees, etc) -
£3,000 (buying costs, e.g. survey fees, stamp duty, etc)
= £44,000 (the net gain/Chargeable Gain) -
£11,700 (tax allowance) =
£32,300 (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 total income of more than £46,350 (ie between £46,351 and £150,000) in the 2018/19 tax year, she will be a higher-rate taxpayer. This means her entire taxable gain will be taxed at 28%: £32,300 x 28% = £9,044.
- Basic rate taxpayer: If Kate’s income is less than £46,350 (ie between £11,850 and £46,350), 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 £16,350 of her basic-rate band will still be available (£46,350 - £30,000). Consequently, the first £16,350 of her capital gain will be taxed at 18% and the rest at 28%:
£16,350 x 18% = £2,943 +
£15,950 x 28% = £4,466
Total tax = £7,636.
If Kate has no taxable income for the year, or has income of less than her personal allowance (£11,700), her entire taxable gain will be covered by her basic-rate tax band and will be taxed at 18%: £32,300 x 18% = £5,814.