Capital Gains Tax
What is it?
It's a tax on any gains you make when selling an asset for more than you paid for it. Taxable assets include items such as shares, unit trusts, land, property, antiques and art.
How much do I pay?
Capital Gains Tax (CGT) is paid on all gains you make, from selling assets over the course of a tax year, that exceed your annual allowance. The allowance
for the current tax year is £11,300 and the rates are:
||Basic rate taxpayers
||Higher and Top rate taxpayers
The tax rates apply to all gains exceeding the allowance that fall into that tax band.
Mr Profit sells some shares for £20,000 having bought them 10 years ago for £5,000, a gain of £15,000. After deducting his annual CGT allowance of
, he's left with a taxable gain of £3,700
. If it falls into his basic
rate tax band he must pay 10%
tax, i.e. £370
. If it falls into his higher
rate tax band he'll pay 20%
, equal to £740
. If it falls into
both tax bands each part is taxed at the respective rate for that band.
- If you are married, or in a civil partnership and living together, you can transfer assets to your husband, wife or civil partner without having to pay CGT.
- If you give or sell assets cheaply to your children, or others, you must still calculate any gains (and pay CGT) based on the market value of those assets.
- If you are given or inherit an asset and later sell it, any gain will be based upon the market value of that asset at the time you received it.
Mrs Generous gives her daughter a painting worth £15,000, which she originally bought for £3,000. For CGT purposes this will be treated as a gain of £12,000, on which Mrs
Generous is liable to pay tax.
Which assets are not subject to CGT?
You do not have to pay CGT on the following:
- Your home, provided it was your main residence.
- Private cars.
- Jewellery, paintings, antiques and other personal effects that are individually worth £6,000 or less.
- UK Government stocks ('gilts').
- Assets held in an Individual Savings Account (ISA) or pension.
- Betting, lottery or pools winnings.
- Gifts of assets to charity.
- Venture Capital Trusts (VCT) and Enterprise Investment Schemes (EIS) - both are generally higher risk investments.
Mr & Mrs Fine own a home where they live in London and a holiday home in Devon. If they sell the home in London, their main residence, there will be no CGT on the gain. However,
their holiday home in Devon will be subject to CGT if they sell, unless they move there permanently having sold the London home and make it their new main residence.
Making best use of you CGT allowance
With a bit of careful planning it's possible to minimise the impact of CGT, or even avoid it altogether:
Use you annual allowance as regularly as is practical
Where possible it makes sense to 'strip out' gains from investments such as shares or unit trusts within your annual allowance rather than sit back and let a fat gain
build up over a number of years - leaving you with a big tax bill when you eventually sell.
Mr Active and Mr Lazy are both basic rate taxpayers and own a range of shares worth £10,000. After five years the shares have increased in value to £18,000 and after 10 years they're worth £26,000.
Mr Lazy doesn't touch the shares before selling in year 10 at a £16,000 profit. Because this is £4,700
above his annual CGT allowance he'll
face a £470
Mr Active decides to sell the shares and buy shares in other companies after five years. The gain of £8,000 is within his annual allowance (he has no other gains that year) so
there is no CGT to pay. He then sells the lot after 10 years and makes another £8,000 gain (as the purchase price was £18,000). Because this is within his annual allowance
there's no CGT to pay.
Of course, it's not always practical to do this, maybe you don't wish to sell a particular share. But taking gains as you go along could save you a fortune in CGT over
the course of your life.
Note: if you sell a particular share, you must wait 30 days before buying it back if you wish to 'trigger' the gain. This strategy therefore tends to work best when you
sell shares in one company with the intention of buying shares in another.
Hold assets jointly
Because you and your spouse or partner both have individual annual CGT allowances, holding assets jointly allows you to benefit from using both allowances at the same
time. Alternatively, you can transfer assets to your spouse if it helps to use their allowance.
A way to defer CGT
You can defer a CGT bill by investing the gain in the shares of an Enterprise Investment Scheme (EIS) qualifying company. The shares must be purchased within the period one
year before or three years after the gain arose.
While this might seem attractive, EIS shares can be very high risk (they tend to be small, young companies) so tread very carefully when pursuing this route. No point
deferring a gain if you lose your investment!
If you sell all or part of your business, you could enjoy some CGT relief via an effective tax rate of 6% on the first £5 million of
qualifying gains. This is a lifetime allowance, so once it's fully used (potentially by the sale of more than business) you can claim no further relief.
Entrepreneurs relief applies to trading businesses, excluding property letting (other than furnished holiday letting).
Capital Gains Tax Jargon
Here's some of the more common capital gains tax jargon you might come across:
|Annual Allowance||The amount of gains you can make each tax year before tax is due.
|Indexation Allowance||An allowance that lets you increase the purchase cost of an asset by inflation. Indexation stopped in April 1998 and has not applied to the sale of assets since April 2008.