Capital gains tax in the UK

Until the government starts taxing sex, capital gains tax (CGT) is probably the most annoying tax to find yourself paying.

Capital gains tax is levied on the profits you make when you sell or transfer most assets. These assets include shares, investment properties – even a stake in your own company.

Like a fly in your soup on your birthday, capital gains tax can really spoil the fun of making money.

Inheritance tax is a tax on your good fortune. Income tax is the cost of having a job.

CGT is a tax on investing success.

Take shelter from CGT! Always try to use tax shelters like ISAs and pensions to shield your investments from taxes where possible. No tax is payable on gains realised within these wrappers.

Of course, you won’t always make a profit when you sell an investment.

Sometimes you’ll lose money. That’s called a capital gains loss.

Unfortunately you don’t get money back from the government when you lose money.

However you can offset capital losses against your capital gains to reduce the total gain you pay tax on. You can also defuse unsheltered gains using your annual CGT allowance.

How UK capital gains tax works

Like income tax, CGT is calculated on the basis of the tax year. This runs from 6 April to 5 April the following year.

You pay tax on the total taxable gains you make selling assets in the tax year, after taking into account:

• Your annual CGT allowance. (See below).

• Other reliefs or costs that can reduce or defer the gains.

• Allowable losses you made by selling assets that would normally be liable for CGT. (The opposite of a capital gain, in other words).

Everyone has an annual capital gains tax allowance, or ‘annual exempt amount’ in HMRC-speak. This allowance is £6,000 up to 5 April 2024. However, the allowance will be halved to £3,000 from the 6 April 2024, whereupon it will be frozen.

If your total taxable gains, minus any deductions, comes to more than your annual allowance, then you pay CGT on everything over that tax-free allowance.

Capital gains tax rates

There are several different rates for capital gains tax. The rate you’ll pay normally depends on two things:

• Your total taxable income.
• What sort of assets you’ve made a profit on. Second homes and buy-to-let properties are taxed at different rates from other assets.

For most taxable assets:

• Basic rate taxpayers pay 10% on their capital gains.

• Higher rate taxpayers pay 20%.

For second homes and buy-to-let properties:

• You’re charged 18% at the basic rate on your property gains.

• Higher rate taxpayers pay 28%.

Your main home is nearly always exempt from capital gains tax under what’s called Private Residence Relief. This is automatically applied unless you’ve let your home out to more than a single lodger, used it for business, or if you’ve substantial acreage. In those cases, CGT might be payable.

Note that you might normally be a basic rate taxpayer, but pay a higher rate on your capital gains. This could happen if the money made via your gains moves you into the higher rate tax bracket.

To work out what rate you’ll pay, your capital gain is added to your taxable income from other sources (salary, dividends, savings interest, and so on).

It can get a bit complicated. See HMRC’s notes on working out your capital gains tax rate band.

What is CGT charged on?

Historically-speaking, CGT has been a fairly avoidable tax for most everyday investors in the UK.

(Remember, you’re allowed to mitigate your taxes. Tax evasion is illegal.)

However the big decline in the annual CGT allowance – from over £12,000 a few years ago to just £3,000 from 6 April 2024 – has made it much harder to mitigate a potential capital gains tax bill.

Putting assets into tax shelters where possible before they make any gains has thus become even more important.

Most capital gains on asset sales are taxable, but in the UK capital gains tax is NOT charged on:

• Your main home (in 99% of cases)
• UK Government bonds (gilts)
• ISA and SIPP holdings
• Personal belongings worth less than £6,000 when you sell them
• Your car, unless used for business
• Other possessions with a limited lifespan
• Betting, lottery, or pools winnings (including spreadbets)
• Money which forms part of your income for Income Tax purposes
• Venture Capital Trusts
• Certain business holdings that qualify for entrepreneur’s relief

That still leaves many key assets liable for UK capital gains tax:

Remember if you can hold these assets inside a tax shelter (ISA or pension) you’ll escape the clutches of capital gains tax.

As I’ve already mentioned, you also have that annual capital gains tax allowance. So you won’t necessarily be liable for CGT just because you’ve sold some taxable assets and made a profit. It all depends on your total gains for the year.

You might also be able to postpone paying your CGT bill by claiming deferral relief on certain special government-sanctioned investment schemes (EIS and SEIS). However these investments can be very risky.

Do your research, and don’t risk big losses just to cut your tax bill.

When to report capital gains tax

You need to report your taxable gains via your self-assessment tax return:

• If your total taxable gain in the tax year exceeds your CGT allowance, and/or

• If your sales of taxable assets are in excess of £50,000.

Under the current regime, if you sold £20,000 worth of shares in the year for a total gain of £5,000, there’s no need to report any of it. £5,000 in gains is below the 2023-2024 annual allowance. And your total sales were less than £50,000.

In contrast, if you’d sold £55,000 of shares, say, you would have to report the details to HMRC, regardless of your total gain. You’ve sold taxable assets in the year excess of the £50,000 annual threshold.

Note that the prior annual reporting limit (which was set at four times the annual CGT allowance) was replaced in April 2023 by the fixed £50,000 figure.

Capital gains are pooled together

All capital gains and losses go into the same ‘pot’ from the Inland Revenue’s point of view.

For example, if you made a gain (that is, after your costs) of £15,000 selling shares and £8,000 selling an antique wardrobe, your total capital gain is £23,000.

Here losses might help you out.

For example, let’s imagine you make a taxable gain on your shares but a loss on selling your buy-to-let property. Your property loss can be offset against your capital gains on shares to reduce or even wipe out the tax bill that might otherwise be due.

See my article on avoiding capital gains tax for other strategies.

Who pays Capital Gains Tax in the UK?

Very few members of the general population ever pay capital gains tax.

A recent study of anonymised personal tax returns found that 97% of people never make any capital gains. And those who did were generally drawn from the ranks of the wealthy.

According to a Guardian story on the research:

Just 0.3% of people with income under £50,000 had taxable gains in an average year, compared with almost 40% of taxpayers with incomes over £5m receiving some gains.

Almost half of those who made a capital gain lived in the south-east. A quarter lived in London.

So we can see that paying capital gains tax puts you into a fairly exclusive club.

For investors, however, capital gains is an occupational hazard. If you are not able to do all of your investing inside ISAs and pensions, then you will pay CGT sooner or later.

Especially now that the annual CGT allowance has been slashed.

Capital gains tax and me

I’ve paid CGT. I wasn’t even very wealthy at the time. Certainly my annual income was no great shakes.

When I began investing 20-odd years ago, it was with a biggish lump sum that I’d originally saved up as a house deposit.

I should have steadily put this cash into ISAs over the ten years or so it took me to save it. But I was silly and I didn’t. And so when I began investing, I had to build up my ISA tax shelter capacity from scratch. One year’s allowance at a time.

Many years on this landed me with a five-figure CGT bill when I finally sold the last of my unsheltered investments – despite years of diligently defusing my gains along the way, as best I could.

This particular investment had gone up more than ten-fold since I bought it.

Lucky me you say, but remember I wasn’t super-rich. I began as just a determined saver trying to keep up with the runaway London housing market. My initial deposit comprised of several tens of thousands of pounds of hard-won savings that I could have spent instead on holidays, clothes, or simply having more fun in my 20s and 30s, like most of my friends did.

Which is why I write ‘make’ a capital gain, or even that you ‘earn’ such a gain.

Whereas The Guardian with its own biases says you ‘receive’ it. As if the capital gain just falls from the sky – like windfall.

That is true of an inherited gain, say, at least for the recipient. But capital gains nearly always come after you’ve put your own money at risk.

So do what you can to keep hold of the reward in full.