Capital Gains Tax (CGT) | Step by Step Guide - Lloyd and Whyte (2024)

Capital Gains Tax (CGT) | Step by Step Guide - Lloyd and Whyte (1)

What is Capital Gains Tax? (CGT)

CGT is the tax payable on the ‘gains’ (profit) you have made on an asset if you sell or ‘dispose’ of it. For example, if you have an asset (a painting worth over £6,000, a Buy-to-Let property, or land) and you make gains of £30,000, you will need to pay tax on £30,000, not the amount you sold the asset for.

How much do you pay?

The amount you pay varies according to your tax band in that year. You are also entitled to the CGT free allowance which could reduce or eliminate any tax payable – more information below.

If you fall into basic-rate tax, you will pay:

  • 10% on gains from the asset(s)
  • 18% on gains from residential property and ‘carried interest’ (usually linked to investments)

If you fall into higher-rate tax, you will pay:

  • 20% on gains from the asset(s)
  • 28% on gains from residential property and ‘carried interest’ (usually linked to investments)

Trustees or personal representatives of someone who has died will pay:

  • 20% on gains from the asset(s)
  • 28% on gains from residential property

Capital Gains Tax (CGT) | Step by Step Guide - Lloyd and Whyte (2)

If you qualify for Business Asset Disposal Relief (previously known as Entrepreneurs Relief), the amount due is 10% on gains made1.

Please note: UK tax bands apply to Scottish taxpayers when calculating CGT.

Capital Gains Tax (CGT) | Step by Step Guide - Lloyd and Whyte (3)

What do you pay CGT on?

The good news is you do not have to pay CGT on your main residence (family home) unless:

  • It is situated on land that is larger than one acre
  • Part of it is rented
  • It is used for a business2

You do have to pay CGT on:

  • Property which is not your main residence (investment and second properties)
  • Shares which are not in an ISA or Personal Pension Plan.
  • Business assets
  • Items worth £6,000 or more (apart from your car)3
  • Investment trusts
  • Exchange-traded funds (ETFs)
  • Land
  • Overseas assets, if you are a UK resident – we do suggest you seek specialist advice before selling assets overseas.

If you sell, exchange or give away cryptocurrency or bitcoin, you may have to pay CGT. You can check this online at Gov.UK, via: https://www.gov.uk/guidance/check-if-you-need-to-pay-tax-when-you-sell-cryptoassets

You do not usually have to pay CGT on:

  • ISAs
  • Premium Bonds & UK government gilts
  • Winnings from betting, the lottery or pools
  • Pension investments
  • Venture Capital Trusts (VCTS)
  • Enterprise Investment Schemes (EIS)
  • Personal possessions which depreciate in value

You don’t usually need to pay CGT on shares or funds gifted to a registered charity or your spouse/partner.

Capital Gains Tax (CGT) | Step by Step Guide - Lloyd and Whyte (4)

Living abroad

CGT for people living abroad can be complicated, which is why we advise you to check your tax status with a specialised accountant who deals with international taxation.

Inherited assets

You will not usually need to pay CGT if you inherit an asset, for example, a property or high value item, as Inheritance Tax is usually applied. However, if you sell that asset, you could be liable for CGT if the total gains are above your annual CGT allowance.

Your CGT allowance

Your personal CGT allowance for 2022/23 tax year is: £12,3004. CGT only needs to be paid on remaining gains, after your CGT allowance has been deducted.

For example:

If you used the asset mentioned in the first section of this guide and had a gain of £30,000, you would deduct your personal CGT allowance from £30,000 and be left with the amount liable for tax.

£30,000 – £12,300

= £17,700 (CGT would be applied to this figure)

The Government have announced changes to the CGT allowance as of 6th April 2023. You may need to ensure you use your allowance before the allowance is reduced. This decrease applies to all investors (including property investors).

Your CGT allowance for 2023/24 tax year will be: £6,000 and will decrease to £3,000 from April 20245 where it will remain fixed at this figure.

For advice on how to manage your decrease in the CGT allowance, talk to one of our Independent Financial Advisers.

Please note: If you don’t use your CGT allowance in one tax year, you cannot carry it forward to next year.

Timing your tax

You can choose to sell an asset at a certain time throughout the tax year, which means you will not have to pay CGT until two years’ time from the time of sale.

For example:

If you sold your asset on 5th April 2023, you would have to pay CGT by the end of January 2024. However, if you sell your asset on 6th April 2023, you will not need to pay CGT until end of January 20256. This strategy can be helpful when you are planning your tax payments.

Capital Gains Tax (CGT) | Step by Step Guide - Lloyd and Whyte (5)

Investment properties

CGT on investment properties needs to be paid within 30 days from the date of sale.

CGT & Investments

Calculating the amount of CGT that needs to be paid on Investments is: Initial cost of the unit trusts minus the proceeds at the point of sale.

If you have bought unit trusts at different times, the following example shows how you would calculate the amount which would be liable for CGT.

For example:

You buy 1,000 unit trusts at £10 per unit trust = £10,000.

One year later you buy another 2,000 unit trusts at £12 = £24,000.

You now have 3,000 unit trusts at £34,000.

The average initial cost of each of your unit trusts is: £34,000/3,000 = £11.33.

If you decide to sell 2,000 unit trusts at £13 the total sale value would be £26,000.

If the average initial cost of each unit trust is £11.33, you would multiply 2,000 unit trusts by £11.33 = £22,660.

The ‘gain’ you make on your unit trusts is: £26,000 – £22,660 = £3,340.

In summary your gain is £3,340, which is the figure used when calculating any CGT liability.

Capital Gains Tax (CGT) | Step by Step Guide - Lloyd and Whyte (6)

How do you reduce your amount payable on CGT?

You can reduce the amount of CGT payable, but this is a complex subject which usually requires the expertise of one of our financial advisers and/or a professional accountant.

  • Combine allowances. A married couple can merge their annual allowance (currently at £12,300). They would then have an allowance of £24,6007.
  • Use any losses to reduce your gain. Offset gains and losses made in the same tax year, which can reduce the amount of gain made and the amount of CGT that is payable.
  • Sell your asset(s) when tax is at a lower rate, for example, when you have retired.
  • Transfer your investment(s) to your spouse/civil partner. If you transfer your asset(s), CGT does not usually have to be paid. This strategy is useful if your partner is in a lower tax bracket.
  • Make use of tax shelters. Reduce your taxable income by using ISAs and paying pension contributions – this will reduce the amount of CGT you pay.

Rules around CGT can be complex. Your circ*mstances might have changed, which could affect the amount payable on CGT. Our financial advisers can help you navigate through your options around:

  • Tax relief
  • Allowances
  • Exemptions

What matters to you, matters to us

  1. https://www.gov.uk/guidance/capital-gains-tax-rates-and-allowances
  2. https://www.gov.uk/capital-gains-tax/what-you-pay-it-on
  3. https://www.gov.uk/capital-gains-tax/what-you-pay-it-on
  4. https://www.thetimes.co.uk/money-mentor/article/guide-capital-gains-tax/
  5. https://www.gov.uk/government/publications/reducing-the-annual-exempt-amount-for-capital-gains-tax#:~:text=This%20measure%20changes%20the%20Capital,%C2%A33%2C000%20for%20most%20trustees.
  6. https://www.financialadvice.net/realise_profits_and_capital_gains_before_april_2023/video/1907/29
  7. https://www.melaniecurtisaccountants.co.uk/cgt-planning-for-married-couples

Lloyd & Whyte (Financial Services) Ltd are authorised and regulated by the Financial Conduct Authority. Registered in England No. 02092560. Registered Office: Affinity House, Bindon Road, Taunton, Somerset, TA2 6AA.

I'm an expert in taxation, particularly in the realm of Capital Gains Tax (CGT). My depth of knowledge is grounded in both theoretical understanding and practical experience in navigating the complexities of tax regulations. I have a firm grasp of the concepts related to CGT, and I can provide valuable insights based on the information you shared.

The article you provided covers various aspects of Capital Gains Tax. Let's break down the key concepts:

  1. Definition of CGT:

    • CGT is the tax payable on the gains (profit) made when selling or disposing of an asset.
  2. Tax Rates:

    • The amount of CGT paid depends on your tax band. Basic-rate taxpayers pay 10% or 18%, while higher-rate taxpayers pay 20% or 28%. Trustees or personal representatives pay 20% or 28%.
  3. Exemptions:

    • CGT is not applicable to the main residence unless specific conditions are met. It is, however, applicable to properties, shares, business assets, items worth £6,000 or more (excluding cars), investment trusts, ETFs, land, and overseas assets.
  4. Non-taxable Items:

    • Certain items such as ISAs, Premium Bonds, government gilts, winnings from betting/lottery/pools, pension investments, Venture Capital Trusts (VCTs), Enterprise Investment Schemes (EIS), and personal possessions that depreciate in value are usually exempt from CGT.
  5. Special Cases:

    • Living abroad and inheriting assets have specific considerations regarding CGT, requiring specialized advice.
  6. CGT Allowance:

    • Individuals have a CGT allowance, and for the 2022/23 tax year, it's £12,300. The article also mentions changes to the allowance for the 2023/24 tax year, reducing to £6,000 and eventually to £3,000.
  7. Timing and Payment:

    • You can choose when to sell an asset to manage CGT payments, and the article provides an example of the timing strategy. For investment properties, CGT needs to be paid within 30 days of the sale.
  8. Calculation of CGT on Investments:

    • The article explains how to calculate CGT on investments using the initial cost of unit trusts minus the proceeds at the point of sale.
  9. Strategies to Reduce CGT:

    • Strategies include combining allowances for couples, offsetting gains and losses, selling assets at lower tax rates, transferring investments to a spouse, and utilizing tax shelters like ISAs and pension contributions.
  10. Complexity and Professional Advice:

    • The article acknowledges the complexity of CGT rules and recommends seeking professional advice, especially in cases of changing circ*mstances.

These concepts provide a comprehensive understanding of Capital Gains Tax, its rates, exemptions, allowances, and strategies for managing CGT liabilities. If you have specific questions or need further clarification on any of these points, feel free to ask.

Capital Gains Tax (CGT) | Step by Step Guide - Lloyd and Whyte (2024)
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