Capital Gains Tax - What is it and how to reduce it
If you have a diverse financial portfolio and you earn money or interest on different assets, you may have heard of something called capital gains tax, or CGT for short.
While you may have heard of it, you might not be entirely sure what it is, which is where our helpful guide comes in to help you out.
Below, we’ve included all the information you need to know about capital gains tax, including what it is, how much it is and when you have to pay capital gains tax on certain things.
What is capital gains tax UK?
In the simplest terms, capital gains tax is a tax on the amount of money you make when you sell or “dispose of” an asset. The money that is taxed is just the amount of profit you’ve made, not the overall sale value of the asset.
For example, if you bought a piece of art for £10,000 and then sold it for £25,000, you would be taxed on the £15,000 profit that you made, not the overall £25,000 that you received when selling the art.
Capital gains tax is calculated based on the amount of profit you’ve made on an asset and which UK tax bracket you fall into.
How much is capital gains tax?
If you sell a property, such as your second home, for example, you’ll have to pay CGT. The capital gains tax rates for property investments for 2021/2022 are 18% CGT as a basic-rate taxpayer or 28% if you pay a higher rate of tax. If you sell other assets such as antiques or stocks, you will be charged for capital gains tax at 10% if you’re a basic-rate taxpayer or 20% if you’re in the higher tax bracket.
However, you'll only need to pay these rates on the gains that exceed your capital gains allowance.
The capital gains tax allowance on a property sale or other assets is £12,300. This is the amount of money you can make from an asset, such as property, during this tax year (2021-2022) before you have to pay any tax on it.
When do I have to pay capital gains tax in the UK?
There are several circumstances in which you will have to pay property tax or other types of CGT in the UK, including:
- If you own a second home or a buy-to-let property.
- If you’ve sold a business, you may be subject to CGT.
- If you own shares in a business. However, you won’t have to pay if your shares are in an ISA or held up in a pension.
- If you have investments or high-value possessions such as antiques, jewellery or paintings, you will have to pay capital gains tax if they’re valued at more than £6,000 when they’re sold.
The amount of money you have to pay depends on which tax bracket you fall into and whether you’ve made a certain amount of profit on your assets within the tax year.
The amount of capital gains tax that you pay is based on the total number of gains (profit) you made within the tax year. So, if you make a profit when selling one asset, but you make a loss from selling another, you can deduct the loss from the gain to give you less capital gains tax to pay.
When you actually have to pay your capital gains tax bill depends on the type of assets you own. For example, if you sold a property after the 27th October 2021, you will have 60 days from the sale date to pay your CGT bill. In order to make the payment, you must submit a property return directly to HMRC.
Alternatively, if you’ve made a gain from selling other assets and you need to pay captial gains tax, you must fill in a self-assessment tax return and complete the necessary details on there.
Which assets are exempt from capital gains tax?
It’s also important to note that there are some assets that are exempt from being subject to capital gains tax, which means they can be sold tax-free, including:
- Private vehicles that are not used for business purposes.
- Your home if it is your sole property and not a second home or holiday home.
- Monetary gifts to charity.
- Personal possessions worth less than £6,000.
- Winnings from betting or lottery.
How to avoid capital gains tax on second homes in the UK
While completely avoiding paying capital gains tax is pretty hard to do and even illegal in some situations, there are several ways you can get around paying capital gains tax, especially on a second home in the UK. Take a look at some of the ways below.
- If you have a spouse or civil partner, you can transfer assets (in this case, the second property) to a joint name so that you have a tax-free allowance of £24,600.
- If you have children, you could gift the property to a child through a trust.
- You could change your primary place of residence - if your second home is worth significantly more than your actual home, you could call your second home your primary place of residence, meaning that you wouldn’t pay capital gains tax on it, even if you’ve just swapped it to become your main residence.
What is entrepreneurs’ relief?
If you’re a business owner but you want to sell your business for a profit, you may be able to benefit from a special capital gains tax relief called entrepreneurs’ relief which is also known as business asset disposal relief.
This means you could benefit from paying less tax when you sell your company if you qualify for business asset disposal relief.
This relief means that you will only be charged capital gain tax at the basic rate of 10% on the first £1 million of gains that you make.
You might also like to read: Income Tax and National Insurance Explained