Capital gains tax, or CGT, is a tax payable on any profit you make when selling or otherwise disposing of an asset. The tax only applies to the profit, i.e. the difference between the price you paid and how much you get back when you sell it.
You buy a property for £200,000
You then sell it for £210,000
Capital gains (or profit) from this transaction would be £10,000
You will therefore need to pay tax on that £10,000*
*if the property is not your main home, and your total capital gains exceeds the annual tax-free allowance given for the current tax year.
If you sell an asset you own with someone else, such as a property you jointly own with a partner, you may also have to pay capital gains tax on your share of the gain.
You won’t usually need to pay capital gains tax when you sell your main residential home, unless you have let out part of it for profit, used it solely for business purposes or it exceeds 5000 square metres.
When we think about property, capital gains tax is payable when you make a profit from the sale of any property that is not your main residential home, so could include:
Holiday homes and holiday lets
Buy to let investment properties
Any other commercial property owned
Capital gains tax does not only apply to property, however, and may also apply to other assets or possessions, such as:
Jewellery, paintings, antiques, and coins worth £6,000 or more
Shares that aren't in an ISA (Individual Savings Account) or a PEP (Personal Equity Plan)
Non-property business assets, that are not classed as wasting assets (wasting assets typically have a lifespan of less than 50 years, so things like cars or furniture)
Cryptoassets such as cryptocurrency or NFTs
There are lots of capital gains tax exemptions, including certain gifts, such as:
Gifts between husband and wife or registered civil partners
Gifts to charities
The sale or gifting of private cars
The sale or gifting of jewellery, antiques, paintings and coins worth below £6,000
ISAs, pensions and other national savings products
Life insurance payouts, unless they are second hand
Anything you leave behind when you die (although inheritance tax may apply)
The capital gains tax allowance you are entitled to will depend on your income and the type of assets you sell. The allowance will change each tax year, so be sure to calculate your taxable profit based on the relevant entitlement.
The UK capital gains tax allowance for 2022/23 has not yet been announced, however, this will not apply until April 6th 2023.
The capital gains tax allowance 2021/22 is £12,300
This amount is for individuals, so a married couple or civil partners will receive £24,600 allowance on jointly owned assets.
If you sell an asset that is liable for CGT before and including April 5th 2023, the allowance for the 2021/22 tax year will apply.
Different rules apply to trusts, find out more about capital gains tax for trusts here.
The tax rates for capital gains have not changed since 2017, however, if there is to be any change to the capital gains tax rates for 2022/23, this will be made public in April.
At the current time, the CGT rates are:
10% for basic rate taxpayers, and 20% for higher and additional rate taxpayers for non-property assets
18% for basic rate taxpayers, and 28% for higher and additional rate taxpayers for second homes and investment properties
If you are usually a basic rate taxpayer but your capital gains push you over the basic rate taxpayer threshold, you will be charged CGT at the same rate as higher rate taxpayers.
Here are the steps you need to take to calculate how much you owe in capital gains tax:
Work out the gain for each asset you have made a profit on (or your share of an asset if it’s jointly owned)
Add together the gains from each asset
Deduct any ‘allowable losses’ if applicable
If the total is greater than the relevant tax year’s CGT allowance (currently £12,300), you will need to pay the appropriate CGT rate (see above) for your taxpayer status, whether that’s basic, higher or additional
If you need to pay capital gains tax, you can also find help with calculating how much you need to pay using the government’s capital gains tax calculator.
You can report any losses from the sale of assets that would usually be liable for CGT to HM Revenue and Customs (HMRC). These are known as ‘allowable losses’ and are deducted from any gains you’ve made in the same tax year.
If you still owe CGt after reporting losses from the current tax year, you can also deduct any unused losses from previous tax years.
HMRC does not send out bills for Capital Gains Tax, so you will need to work out if you have made CGT gains above your tax-free allowance.
If your total taxable gains are above your allowance, you’ll need to report and pay Capital Gains Tax within the designated timescales:
Within 60 days for any property sale (except your main residential home) in the UK with a completion date on or after 27 October 2021
Within the tax year after you sold or disposed of any non-property related asset
Payments are usually made online using the government gateway service, and can be done through your tax return, should you provide one. You can also use the HMRC real-time capital gains tax service or contact HMRC to request a paper CGT form if you are unable to use the service.
Don't get caught out: Although capital gains tax is self-reportable, if you do not inform HMRC about any relevant profits and pay the applicable CGT owed, they will issue fines that are likely to outweigh the original bill!”Kellie Steed, Mortgage Content Writer
A gain for the purpose of CGT is usually the difference between what you paid for your asset and what you sold it for.
However, there are some situations where the market value should be used instead:
Gifts should be costed at market value at the time the gift was given
Assets that were sold at a discount rate to benefit the buyer, the market value at the date of sale should be used
Inherited gifts where the inheritance tax value is unkown, the market rate at the gift givers time of death should be used
For any assets owned prior to 1982, the market value at 31 March 1982 should be used
Any profits that are below the current CGT threshold of £12,300 are free from capital gains tax, as well any profits from wasting assets (such as cars) or profits made from the sale of your main residential home, in most cases.
You will also not need to pay CGT on any profits from:
Gifts between husband and wife or registered civil partners or to charity
The sale or gifting of jewellery, antiques, paintings and coins worth £6,000 or less
Gambling winnings such as lottery wins
ISAs and pensions
Life insurance payouts
Anything inheritance you leave (although inheritance tax may apply)
There are a few ways to reduce the capital gains tax you might need to pay, depending on your circumstances. HMRC has allowable losses, so if you have made a loss on the sale of any asset that you have sold, this is deductible from the CGT you owe. The allowance is also transferable between spouses, so if you or your partner has some of the CGT allowance remaining, this can be passed to the other spouse in order to increase their tax-free allowance.
People don't usually end up having to pay capital gains tax when they sell their own residential home, as your main residence is usually exempt from capital gains tax.
However, CGT may be due when you sell your main home if you have let it out or used it as a business premises. You may also have to pay capital gains tax on any profit you make from the sale if the size of the property (including grounds) is more than 5,000 square metres.
If you sell a second home, or any subsequently owned properties, then any profit you make will usually be subject to capital gains tax.