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Capital Gains Tax explained

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Person using a calculator to work out capital gains tax

Income tax is a tax on what you earn. Inheritance tax is a tax on what you inherit. Some taxes are more straightforward than others. But what is Capital Gains Tax? Let’s take a look.

What is Capital Gains Tax?

Capital Gains Tax (CGT) is a tax on any profit you make when you sell something you own that has gone up in value. You pay tax on the gain, not on the full amount of money you’ve received.

So if you bought a piece of art for £10,000 and sold it later for £25,000, you’ve made a gain of £15,000. With CGT, you’ll pay tax on that £15,000.

 

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What do I pay Capital Gains Tax on?

You pay CGT on personal possessions, or ‘assets’, you sell that are worth £6,000 or more, except your car or home.

There are a lot of items that you might pay CGT on:

  • Personal valuables, like jewellery or art

  • A second property, like a holiday home

  • Shares that aren’t in a tax-efficient ISA or PEP

  • Business assets.

You might have to pay it on cryptocurrency like bitcoin too.

You don't need to pay CGT on any possessions with a lifespan of less than 50 years, like clocks or antique books.

If you share an asset with someone else and you sell it at a profit, you’ll have to pay CGT on your share of the gain.

 

What is the current rate of CGT?

For assets other than property 

The current rate of capital gains tax is 10% if you’re a basic rate taxpayer, or 20% if you’re a higher or additional rate taxpayer.

For property, like a second home or a buy-to-let investment

The rate is 18% for basic rate taxpayers, or 28% for higher and additional rate taxpayers.

 

Do I have to pay CGT on all the gains I make?

No. You only have to pay CGT on any gains you make over your tax-free allowance, which is also called the Annual Exempt Amount.

The tax-free allowance is currently £12,300, or £6,150 for trusts.

You can also take into account any costs to do with valuing the item, or advertising the sale. 

And you can bring down any CGT you might have to pay in one tax year by offsetting any losses you make elsewhere.

Let’s say you have two additional properties and decide to sell them both in one tax year.

If you sell one at a profit and the other one at a loss, you can deduct the loss from the gain to reduce the overall profit you need to declare.

 

If I sell my main home, do I need to pay CGT?

Usually, you won’t have to pay CGT if you sell your main residential home. There are some exceptions though.

If you’ve let your home out or if you’ve used it as a business premises, then you might have to pay CGT.

And if your property is larger than 5,000 square metres, including the grounds, then you might have to pay CGT as well.

 

How does CGT work when it comes to inherited property?

If your parent or another relative leaves you their home in their will, you should inherit the property at its market value at the time of their death.

There’s no CGT to pay straight away. But the value of the home will be included in the estate of the person who left it to you. And there may be inheritance tax to pay on the estate.

If you sell the home without having lived there, and the property has gone up in value, there could be CGT to pay on the increase in value.

If your relative gives you the home while they are still living, it will still be taken into consideration for inheritance tax. And you might have to pay CGT too.

 

Selling expensive possessions and insurance

If you own a high-value item, you might have it listed on your contents insurance policy. If you decide to sell it, remember to remove the it from the policy.

Cover for expensive items could raise your home insurance cost, so removing it after you sell could help keep it down.

READ MORE: Cover for high-value items explained

 

How can I find out more about Capital Gains Tax?

The best place to find detailed information about how it all works is on the GOV.UK site.

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