Do you need to pay Capital Gains Tax?
What is Capital Gains Tax?
In the UK, Capital Gains Tax, also known as CGT, is an HMRC tax on the gain you make when you sell or dispose of an asset that has increased in value. Selling or disposing of an asset also includes giving it away as a gift, transferring it to someone else, swapping with another asset or receiving compensation for an asset you own, like receiving compensation from an insurance pay out.
It is important to know that you do not pay CGT on all of the money you receive from selling or disposing of an asset, it is only the amount of money you have gained after you previously bought or came into possession of the asset, which will be taxed by HMRC. CGT rules and legislations differ depending on the type of personal ‘chattel’ or asset in question. However, to put it simply, if you paid £10,000 for an asset, and then sold it at a later date for £35,000, you would only pay CGT on £25,000. This is because £25,000 is the amount of money the asset has increased by and what HMRC would consider your gain or increase in value. Click on our flow chart on the right to see if you may need to pay CGT on the assets you are disposing of, or better still, get in touch with an accountant who will be able to advise you on the steps you may need to take.
What are the UK Capital Gains Tax Rates 2022/23?
We’ve created an easy-to-read table on the right to show the UK Capital Gains Tax Rates for 2022/23 and how they differ depending on whether you meet the criteria for the basic rate, where your overall annual income is £50,270 or below, and the higher/additional rate tax band, where your overall annual income is above £50,270. Our next easy-to-read table on the right shows the UK tax free allowance, which is the tax-free amount of money you’re eligible to receive when disposing of an asset. You can also download our handy 2022/23 UK Tax Rate Card from our website, which will give you all of the up-to-date tax rates as well, including the CGT rates.
What do you pay Capital Gains Tax on?
You pay CGT on what HMRC classifies as chargeable assets, which include:
- Personal possessions worth £6,000 or more.
- Property that is not registered as your main occupancy, like a second home.
- Property that IS registered as your main occupancy, but you have let it out, used it for business purposes, or it is very large (‘very large’ considered to be over 5,000 square metres).
- Business assets, like machinery, fixtures, and fittings.
- Bitcoin and Cryptocurrency.
You do not pay CGT on:
- Your own personal car, even if you sold the car and made a profit, unless it has been used for business purposes.
- Wasting assets, which are personal possessions with a lifespan of less than 50 years, again this only applies if you have not used these possessions for business purposes.
- On the first £6,000 of your share of a possession, if it is jointly owned with other people.
- Gifts given to charity, a spouse or civil partner.
- Gains you may make from ISAs or PEPs.
- Gains from UK Government gilts and Premium Bonds.
- Gains from winnings from betting and pool winnings.
- Gains from winning the National Lottery.
- The inheritance of an asset (as inheritance tax is paid on this instead, unless you later dispose of an asset you have inherited).
It is important to note that different CGT regulations apply to non-domicile residents of the UK, and when you are a domicile UK resident who is selling a taxable asset abroad as well. There are also different rules and legislations surrounding the sale of items, such as property, the CGT that will need to be paid, and the releifs that you may or may not be eligible for. We advise you get in touch with an accountant who will be able to outline exactly what CGT you will pay and why.
How do you Calculate Capital Gains Tax?
To calculate CGT, you will need to work out the monetary gain on each asset you have sold within the tax year. Once you’ve done this, you’ll need to add all of your gains together to give you one total sum. Be sure to take off your tax-free allowance as well. The remaining monetary amount will be the total, which HMRC will then tax you on, in accordance with the UK’s Capital Gains Tax Rates for the year 2022/23.
For example, within the tax year of 2022/23, if you had purchased two personal assets for £10,000 each and then subsequently sold them for £35,000 each, you would need to do the following calculation:
- £35,000 + £35,000 = £70,000 (The sum total of the sale of both assets)
- £10,000 + £10,000 = £20,000 (The sum total of the original purchase value of both assets)
- £70,000 – £20,000 = £50,000 (The sum total of the gain you have made)
- £50,000 – £12,300 = £37,700 (The sum total of your gain, with the subtraction of your tax-free allowance)
You are left with £37, 700 which is the gain that HMRC will then tax at 10% (basic rate) or 20% (higher/additional rate) dependent on your salary. If you earn over £50,270 then HMRC would tax you at the additional/higher rate of 20%. This means a total of £7,540 will be subtracted from your gain of £37,700, leaving you with the net gain of £30,160.
How can you minimise your Capital Gains Tax?
The most obvious way to minimise your CGT is making sure you’ve made full use of your personal tax-free allowance of up to £12,300 in the 2022/23 tax year, as this cannot be carried forward to the next tax year. You are also able to offset your losses against your gains, to minimise your CGT liability. If you didn’t use your losses from previous years, these can be brought forward but must be reported to HMRC within four years of the asset being disposed of.
Gifts and transfers between spouses or civil partners are exempt from CGT, which means you are able to transfer your asset to your spouse or partner, who can then use their annual CGT exemption to dispose of the asset. In other words, this could potentially double your CGT tax-free allowance. There are also many different types of reliefs which can be claimed when paying CGT in order to minimise your payments, so do seek out the advice of an accountant who can advise you on what you can claim and why you are eligible.
What to do next…
With a quick turn-around and short deadlines to keep to, calculating and reporting Capital Gains Tax without the help from an accountant may seem a stretch too far. Call us on 01491 578207 and we’ll book you in with one of our experts, who will show you how it’s done and provide advice on how to minimise your Capital Gains Tax as well.