What is Capital Gains Tax (CGT)

What is capital gains tax?

Capital gains tax is a form of government taxation relating to gains made on the value of assets (things that you own) held for more than one year.

This can include the sale of shares for example, or the sale of a business, inherited properties or second homes. It can apply to any valuables you might own over a certain value if you sell them at a profit.

This also includes gains made on Cryptocurrency sales.

Unlike income tax, CGT is not automatically deducted by HMRC and needs to be self-reported.

Capital gains tax rates

If you are a UK resident, you may be liable to CGT on disposals of assets located anywhere in the world, not just your UK-located assets. CGT rates differ from income tax rates and are in two broad brackets: basic rate payers and higher/additional rate payers.

Non-residents are liable to CGT if they are carrying on a trade in the UK.

If you are non-resident (including in the overseas part of a split year), you may also be liable to CGT on the disposal of UK land and property (although private residence relief may apply).

There are special rules for CGT purposes that apply to individuals who are normally resident in the UK but are temporarily resident outside the UK (broadly this means those who are non-resident in the UK for less than five years).

Capital gains tax allowance

When considering your tax return, you’ll be pleased to know that there is a capital gains tax allowance.

It is currently set at £6,000 for individuals, meaning that you can make £6,000 of profit on your assets before the applicable rates kick in. From 2024/25, we expect this will be reduced further to £3,000, though this is not yet confirmed.

Should you have joint ownership of a taxable asset such as a second home, the allowance doubles to £12,000. For those who are married or in a civil partnership, assets can be exchanged between you.

However, be aware that if you do transfer assets to a partner and make a gain from this at a later date, the CGT that you pay will be based on the total time that you owned the asset(s) together, rather than the date of transference.

If you’re wondering how much capital gains tax you pay on property or when you sell your main residence, it is zero.

How to calculate the gain for capital gains tax

Broadly, to calculate the gain, you compare the sale proceeds (or value of the asset at the time it was disposed of) with the original cost of the asset (or value when it was acquired).

This is illustrated below:

When do you pay capital gains tax?

Anytime you sell a taxable asset and receive more for it than you paid, CGT will apply (there are a few exceptions such as non-business use cars). CGT on second homes (or non-primary residential property) must be declared within 60 days of the sale and any gain being made.

If you’re including CGT within your annual tax return, the official deadline for tax returns is 31st January. The exception to this is the sale of residential property – this should be reported to the government within 60 days.

You must also pay CGT on any cryptocurrency gains that are realised. That is, if you use your gains to buy more cryptocurrency, or you withdraw/convert it to pound sterling, CGT will apply.

You may have to pay CGT when you give an asset as a gift to someone.

The rules are different depending on who you give the gift to and there are special reliefs for gifts of business assets.

CGT can also apply if you transfer assets on separation, divorce or dissolution of a civil partnership.

In some cases, you are treated as if you have disposed of an asset. This might happen, for example, if a personal possession, such as an antique, has been destroyed and you have received a capital sum, such as an insurance pay-out, by way of compensation.

Do you pay capital gains tax on assets you inherit

You do not pay CGT when you inherit an asset, but you may have to pay CGT if you sell, give away or exchange an asset you inherited and it has increased in value since the date of death.

If the asset you inherited increases in value between the date of the deceased's death and the date you dispose of it, the increase is a capital gain.

Are any assets exempt from capital gains tax?

Yes. Some of the most common examples are:

• Private motor cars, including vintage cars

• Gifts to UK registered charities

• Some government securities

• Prizes and betting winnings

• Cash

• Stocks and shares held in an ISA

• Foreign currency held for your own use.

The disposal of your main home is often free of CGT, but this is not always the case. The CGT relief that can be applied on disposal of your main home does not apply to second homes or properties which are rented out, though part of those gain might qualify for relief if the property has previously been your only or main residence.

Shares are not exempt from CGT. If you sell or give away other personal belongings (‘chattels’) then there will be no CGT if your share of the proceeds or value when given away is less than £6,000.

How to pay capital gains tax

If you currently complete a tax return, then CGT can be reported through this. Otherwise, you can use the UK government’s real-time capital gains tax service to pay what you owe immediately.