Capital Gains Tax (CGT) is a tax on the profit made from an asset that has increased in value, typically when the asset is sold. Find out how you could make the CGT rules work for you and potentially reduce your liability.
Capital gains tax (CGT) is a tax on the profit (the ‘capital gain’) made from an asset that has increased in value, typically when the asset is sold. An estimated £17.8 billion in CGT payments will be raised by HMRC in 2023/24 (1), which will be dwarfed by the estimated £268.0 billion raised in income tax payments (2).
Capital gains tax is applied to profits made on the following types of assets:
But certain ‘wasting assets’, meaning those with a predictable life of 50 years or less, could be exempt from CGT (3). These can include plant and machinery.
You can be liable for the tax when you sell an asset for a profit, give it away as a gift (or transfer it to someone who is not your spouse or civil partner or a charity), exchange it for something else or receive compensation for it (perhaps via an insurance payout). For example, if you bought a sculpture for £10,000 and later sold it for £30,000, then you would have made a capital gain of £20,000. You may have to make a capital gains tax payment on the profit you have made on this asset.
But you only have to pay capital gains tax on profits above your annual tax-free CGT allowance, which, in 2023/24, is £6,000. Profits above £6,000 are then charged at the following rates (4).
| Property assets | Other assets | |
|---|---|---|
Basic rate income taxpayer | 18% | 10% |
Higher and additional rate income taxpayers | 28% | 20% |
So, if the seller of the sculpture was a basic rate taxpayer and this was the only capital gain they made in that tax year, then they would have to pay £1,400 to HMRC in capital gains tax, according to the following calculation:
Profit from sale of sculpture = £20,000
Minus: tax-free allowance = £6,000
Amount liable for CGT = £14,000
CGT liability at basic rate of 10 percent = £1,400
Different rates apply to trustees or personal representatives of someone who has died. They pay 28 percent on residential property and 20 percent on other chargeable assets.
However the annual tax-free allowance will be cut to £3,000 from April 2024 (5). On this basis the seller of the sculpture would, at the 10 percent basic rate, have a CGT liability of £1,700 if it were to be sold in the 2024/25 tax year. This means some individuals could potentially benefit from realising capital gains in the 2023/24 tax year, when allowances are higher, rather than in subsequent tax years.
The Treasury rejected the possibility of aligning CGT rates with income tax rates in November 2021. But, with government debt having been driven up by Covid-19 and energy support schemes, the possibility remains for capital gains tax rates to go up in the future.
Capital gains tax rules currently differ for business assets, where sellers can potentially benefit from entrepreneurs’ relief (now called ‘business assets disposal relief’). In this case, qualifying business assets are subject to CGT of just 10 percent on the first £1 million of capital gains during your lifetime. Any profits greater than £1 million would face a capital gains tax rate of 20 percent for higher and additional rate taxpayers.
Although capital gains tax rules may initially seem quite straightforward, things become a little more complex when you drill down more deeply, which we will do now.
CGT rates are determined by your rate of income tax. Currently, basic rate income taxpayers are those with annual income of less than £50,270. But some basic rate income taxpayers could make taxable capital gains that push them beyond this basic rate threshold, as chargeable capital gains are added to income for tax purposes. So taxpayers would pay capital gains tax to HMRC at 10 per cent on non-property gains that fall within the £50,270 tax threshold and at 20 per cent for gains that exceed £50,270. Scottish taxpayers should use UK tax bands for calculating their CGT liability.
Money spent on transaction costs or increasing an asset’s value can sometimes be offset against capital gains tax. For example, you can deduct the costs of buying or selling shares from your gains. In addition, the cost of eligible improvements to a property can be deducted from gains on its sale.
While you can be taxed on capital gains, you can offset these if you make capital losses. So if, for example, you made a £25,000 loss on the sale of a painting, this would more than offset the profit from the sale of the sculpture in the example above, which means you could have no capital gains tax to pay to HMRC overall. In fact, you can even use losses you’ve reported from previous tax years to offset current capital gains, and there is no limit as to how many years you go back. Moreover, losses don’t have to be reported immediately: you can claim your capital loss up to four years after the end of the tax year in which the asset was sold or otherwise disposed of.
Let’s suppose you sell some of the shares you own in one company and that some of these shares were purchased at different times for different prices. To work out your capital gain you must first add up the cost of all these various purchases in this company’s shares. You then divide this total cost by the total number of shares held in the company, to give an average share purchase price.
Let us now suppose you have an average share purchase price of 40p and you sell 1,000 shares in the company for 90p each. In this case the purchase price will be considered to be £400 (1,000 x 40p) and the sale price £900 (1,000 x 90p), giving you a capital gain of £500.
But the capital gains tax rules differ for shares in one company that are sold and then bought back the same day and also for shares in one company that are sold and then bought back within 30 days. This can be quite a complex area and you may benefit from specialist advice.
Capital gains tax rules on qualifying business sales apply to an individual taxpayer rather than for each business sold. So £1 million is the most a single person can claim for at the 10 per cent rate, no matter how many business assets were sold. You need to own at least 5 per cent of the company’s shares and voting rights to be eligible for this relief.
There are sensible ways that aim to reduce your capital gains tax liability. Here we give you some tips on how to potentially achieve this.
People who are married or civil partners can often transfer assets to each other without paying capital gains tax. Transferring an investment to a spouse with an unused tax-free allowance and/or a lower tax rate could reduce the CGT liability when it is sold.
Married couples or civil partners could consider transferring some assets into joint ownership. This can allow them to make greater use of tax-free allowances, as up to £12,000 of any gain could be tax-free once their individual £6,000 allowances for 2023/24 are pooled together.
If your income tax rate will fall in the future, then you could consider deferring the sale of an asset, as the capital gains tax rate is based on your income tax rate at the time of the sale. But it is worth remembering that tax thresholds and tax rates could change in the future.
Paying or increasing pension contributions could reduce your taxable income. This could also have the effect of potentially bringing down your capital gains tax rate and reducing your CGT liability. In addition, tax-efficient schemes such as ISAs can reduce your taxable income. This is because you do not pay tax on interest on cash in an ISA or on income or capital gains from investments in an ISA.
You could be liable for capital gains tax if you sell all your investments in one go. By selling them in tranches over several years, you could ensure that each year’s gain is within your annual tax-free allowance, potentially to the point where no CGT is due at all. This approach may be particularly useful for beneficiaries of employee share schemes, such as the save-as-you-earn (SAYE) scheme, enterprise management incentive scheme or company share option scheme.
(1) Office for Budget Responsibility (obr.uk), ‘Capital gains tax’, 21 April 2023.
(2) Office for Budget Responsibility (obr.uk), ‘Income tax’, 19 July 2023.
(3) www.gov.uk, ‘Chattels and Capital Gains Tax 2021 (HS293)’, 6 April 2023.
(4) www.gov.uk, ‘Capital gains tax: what you pay it on, rates and allowances’, 18 December 2023.
(5) www.gov.uk, ‘Reducing the annual exempt amount for Capital Gains Tax’, 21 November 2022.
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