Understanding Capital Gains Tax – When and what you need to pay

Capital Gains Tax (CGT) is a tax on the profit or gain you make when you sell or dispose of an asset that has increased in value. It is the gain you make that’s taxed, not the amount of money you receive.

Understanding when you’re subject to CGT and what you need to pay is crucial for financial planning.

When are you subject to Capital Gains Tax?

The most common scenario where CGT comes into play is when you sell an asset for more than you paid for it. This includes selling property, shares, or personal possessions worth £6,000 or more, apart from your car.

If you give away assets to someone other than your spouse or civil partner, you might be subject to CGT. The amount of tax is based on the asset’s market value at the time of the gift.

If you inherit an asset and later sell or dispose of it, you may need to pay CGT on the gain since the time you took ownership.

Transferring assets to a business can also trigger CGT, and if you receive compensation for an asset, like an insurance payout for a damaged item, CGT might be applicable.

What do you need to pay?

To calculate the CGT, you first need to determine your taxable gain. This is the difference between the selling price (or market value in case of gifts) and the purchase price (or the value when you inherited it). From this gain, you can deduct costs like broker fees or solicitor fees.

Every individual in the UK has an annual tax-free allowance, known as the Annual Exempt Amount. For the 2023/2024 tax year, this is £6,000. This means you only pay CGT on gains above this threshold.

The rate at which you pay CGT depends on your taxable income and the type of asset. For individuals, the rate is:

  • 10 per cent for basic rate taxpayers
  • 20 per cent for higher or additional rate taxpayers

For residential property, the rates are:

  • 18 per cent for basic rate taxpayers
  • 28 per cent for higher or additional rate taxpayers

There are reliefs and allowances, apart from the Annual Exempt Amount, that can reduce your CGT. Some of these include:

  • Business Asset Disposal Relief
  • Private Residence Relief
  • Letting Relief
  • Gift Hold-Over Relief

Reporting and paying CGT

If you have CGT to pay, you can either report and pay it straight away using the Capital Gains Tax service, or you can report it in a Self-Assessment tax return.

If you’re using the latter, ensure you send your return by 31 January after the tax year when you had the gains.

CGT can seem daunting, but with a clear understanding of when it applies and what you need to pay, you can manage it smoothly and effectively. We are on hand to provide assistance on any CGT-related matters, contact us today for more information.

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