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What is Capital Gains Tax?

Some taxes are more straightforward than others. 

Homeowner checking capital gains tax information

Income tax is a tax on what you earn. Inheritance tax is a tax on what you inherit.

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’ll pay CGT on the gain of £15,000.

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

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

  • Personal and high value contents, such as jewellery or art.
  • A second property, such as 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.

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.

 

How much is capital gains tax?

For assets other than property, the current rate of capital gains tax is 10% if you’re a basic rate taxpayer and 20% if you’re a higher or additional rate taxpayer.

For property, such as a second home or a buy-to-let investment, the rate is 18% for basic rate taxpayers and 28% for higher and additional rate taxpayers.

 

What is the capital gains tax allowance?

You pay CGT only 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 during that year.

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.

 

Capital gains tax on property

You’re unlikely to have to pay CGT if you sell your main residential home. There are some exceptions, though.

If you’ve rented out your home 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 also might have to pay CGT.

 

Capital gains tax on second homes

If you have a second home, you’ll almost certainly have to pay CGT on any gains you make when you sell it.

The taxman considers a second home to be an investment.

Therefore, if you see its value go up while you own it, you’ll have to pay CGT on your profits when you sell it.

 

Capital gains tax on inherited property

If a 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 at that point. But the value of the home will be included in the estate of the person who left it to you.

As a result there may be inheritance tax to pay on the estate.

But if you keep the inherited property and use it as a second home, or rent it out, you’ll be liable for CGT when you come to sell it.

This should be based on any increase in its value compared with its market value when you inherited it.

 

Capital gains tax on a gift of property to a child

If you give a property to a child, there’s normally no CGT to pay at that point.

If that then becomes their main residential home, they won’t pay CGT when they sell it.

But if it’s not their main residential home and they later sell it, they’ll need to pay CGT on any profit.

This should be based on the market value of the property when you gave it to them.

 

Selling expensive possessions and insurance

If you own a high-value item, you might have it listed on your home insurance policy, or a separate contents insurance policy.

If you decide to sell it, remember to remove 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.

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How can I find out more about capital gains tax?

The best place to find out more detailed information about how it all works is on the government’s website.