Capital gains tax, also known as CGT, refers to the tax payable on the increase in value of something you own during the time you’ve had it. It usually has to be paid on items that are sold on for a substantial profit, but there are some exceptions.
What you need to pay capital gains tax on
If any of the following are sold on for a considerable profit, you can expect to pay capital gains tax:
- Investments, like shares and bonds, that don’t sit outside a tax wrapper like an ISA
- Any property in the UK that isn’t your main home
- Your main home if you’ve let it out, used it for business or if it’s very large
- If you are resident in the UK selling an overseas property
- Most personal possessions worth £6,000 or more, apart from your car
- Business assets
Who’s exempt from capital gains tax?
Although nobody is exempt from capital gains tax, there are exceptions for what people need to pay capital gains tax on. The sale of your main home won’t be affected by capital gains tax, for example, because this qualifies for ‘private residents’ relief. Special rules also apply for gifts to a spouse or civil partner or gifts donated to charity. The details of exemption can be complex, but you can find out whether your example qualifies for exemption on the government website.
What is the capital gains tax rate?
Your capital gains tax rate will depend on your current tax bracket. Those paying basic income tax will pay 10% for gains, or 18% for gains on a residential property. Those on who pay higher rate income tax will pay 20% on chargeable assets and 28% on gains from a residential property.
What is capital gains tax allowance?
The capital gains tax allowance, often referred to as the ‘annual exempt amount’, is the amount of tax-free profit you’re entitled to make during the course of the year.
The level of tax-free profit is set by the government, and you will only pay capital gains tax on the amount you exceed this figure by.
Although the personal tax-free allowance is the same for everyone, this figure changes each tax year. To find out the current rate, visit the HMRC website.
How much is capital gains tax on property?
If you’re paying capital gains tax on a property that’s not your main home, such as a buy-to-let or a holiday home, the amount you’ll pay will depend on the difference between how much the property was worth when you bought it and how much it’s worth at the time of sale.
You then deduct your capital gains allowance to find out how much profit is in excess of your allowance. This figure will be charged capital gains tax at either 18% or 28%, depending on your total taxable income.
How to calculate capital gains tax
- Start with the amount you sold the possession for
- Subtract the amount it was worth when you bought or inherited it to calculate your profit
- Subtract the annual CGT allowance to get the taxable amount
- If you pay basic income tax, your CGT will be 10% of this figure (or 18% for properties). If you pay higher income tax, your CGT will be 20% of this figure (or 28% for properties)