What is Capital Gains Tax?
Capital Gains Tax (CGT) is a tax on the profit when you sell (or dispose of) an asset that’s increased in value. The value it has gained is what you pay tax on not the amount you received or sold the item for. It could be a business or personal asset. For example, if you bought a business property for £200,000 and sold it later for £350,000 you would pay CGT on £150,000. If you bought a painting for £30,000 and sold it for £60,000 you would pay CGT on £30,000.
There are some exceptions and exemptions as some assets are tax free plus, if your gains in a tax year are under your CGT annual exemption, there is no tax to pay.
What is the CGT annual exemption?
For the current tax year (2023-24) the Capital Gains Tax free allowance is £6,000 and £3,000 for trusts. So if your total capital gain is below £6,000 in a tax year you do not need to pay CGT. It has been announced by the government in the 2022 Autumn Statement that the CGT allowance be lowered to £3,000 from April 2024. This might be something to consider if you are thinking about selling an asset in the next few months.
It is important to note here that if you do not use your allowance in a tax year you are unable to carry it forward to the next tax year. The allowance remains for each year.
What are the current rates?
The rates does depend on your income tax. If you sell a residential property and you pay a higher rate income tax then you will pay 28% on your gains and if you pay the basic rate you will pay 18%.
For other assets higher rate tax payers will pay 20% and basic rate tax payers will pay 10%.
What is exempt from Capital Gains Tax?
There are some distinctive rules that means you do not need to pay CGT on certain transactions. If you give or sell of an asset to your spouse or civil partner or to charity you will not need to pay the tax. Separating spouses or civil partners be given up to three years after the year they cease to live together in which to make no gain/no loss transfer.
However if your spouse or civil partner decides to sell the asset later they will need to pay CGT. The capital gain will be calculated based on the value of the asset when you first owned it and the date they sold it.
Other exemptions include selling:
- a private car
- your main home
- a buy-to-let or second home that was your main home within the past 9 months
- personal belongings such as antiques
This is just the tip of the iceberg, there are many more schemes that are available. The problem with exceptions and exemptions is that the rules are complicated and this is where mistakes can happen.
When is the best time to get advice on Capital Gains Tax?
As early as possible! Why? Because getting advice early and planning ahead before you sell an asset can make a difference to the amount of CGT you have to pay. It can either reduce it, remove it completely or delay payment depending on your circumstances. Once the transaction has happened, planning options are greatly reduced.
When you plan ahead you can consider your options such as:
- Can you sell the asset(s) bit by bit?
- Should you aim to sell before or after the end of the tax year?
- Can you reinvest a gain?
- Is there a structure that can mitigate the tax a little or completely?
Key takeaways
If we can pick one thing we would like you to take away from this guide it would be that you have options.
There are a wide range of planning ideas we can use to help you protect wealth, pay the correct tax, and access value from your assets.
They are all uniquely tailored planning ideas, driven by your objectives which is why it is important you speak to a tax expert.