Some taxes are more straightforward than others. When it comes to capital gains tax it’s due on the profits you make when you sell an asset such as a second home or shares and funds.
It’s easy to work out how much you might need to pay with a capital gains tax calculator. But in simple terms, there are two rates, one for selling property and one for anything else you sell. You also get an allowance you can make before any tax is due. Here we look at exactly how it works, how much it is, and how you pay for it.
What is capital gains tax?
Capital gains tax capital gains tax 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 get.
So if you bought a piece of art for £10,000 and sold it later for £25,000, you pay capital gains taxon the gain of £15,000.
You pay capital gains tax 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 capital gains tax on:
- Personal and high value contents, such as jewellery, antiques 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 have to pay capital gains tax on your share of the gain.
What is the capital gains tax allowance?
You pay capital gains tax 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 tax you might have to pay in a tax year by offsetting any losses you make elsewhere during that year.
Let’s say you have 2 additional properties and decide to sell them both in a 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 you own an asset jointly with someone else, you can both use your allowances, which can double the amount you can make before the tax is due.
Those who are married or in a civil partnership are able to transfer assets between each other without the tax being charged.
How much is capital gains tax?
There are two different rates to pay for capital gains tax, so how much you pay depends on what you’re selling. One is for property, such as a second home or a buy-to-let investment, and the other is for everything else.
- A basic-rate taxpayer pays 18%
- A higher-rate taxpayer pays 28%
- A basic-rate taxpayer pays 10%
- A higher-rate taxpayer pays 20%
When calculating how much you owe, you need to factor in your taxable income plus your capital gains tax allowance.
Let’s say your income was £30,000 and you had made £13,000 profit from selling some antiques. You’d need to deduct the allowance of £12,300, and you’d be left with £700. Capital gains tax is due on this £700 and as you’re a basic-rate taxpayer, this would be 10%, so you’d need to pay £70.
Capital gains tax calculator
Even though it might seem complicated there’s an easy way to work out how much capital gains tax you owe.
1. Work out what your taxable income is
That’s the amount of money you earn each year, minus your tax-free personal allowance of £12,570.
2. Deduct the capital gains allowance from the profit you’ve made
There are different rates depending on what you’re selling, and whether you’re a basic or higher-rate taxpayer. You can also take away any costs associated with buying and selling the item.
3. Add together the amounts from 1 and 2, your taxable income and the taxable capital gain
You’ll pay the basic-rate of tax until you earn more than £37,700 (don’t forget your tax-free allowance too). If your total is less than this amount, you’ll pay the basic rate of capital gains tax which is 18% on second homes and 10% on anything else. If not you’ll pay 28% on second homes, and 20% on everything else.
4. Calculate the percentage (eg 10% if you’re a basic-rate taxpayer not selling a second home) of your profit
This is be the amount you’ll have to pay.
When do I not have to pay capital gains tax?
You don’t have to pay capital gains tax on everything. You won’t pay it on profits from any of the following:
- ISAs or PEPs
- UK government gilts and Premium Bonds
- Betting, lottery or pools winnings
You usually don’t pay it on gifts from a partner if you’re married or in a civil partnership either. You can find out the full list of exemptions at GOV.UK.
What is the capital gains tax on property?
You’re unlikely to have to pay capital gains tax 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 the tax.
If your property is larger than 5,000 square metres, including the grounds, then you also might have to pay capital gains tax.
However, if you have a second home, you almost certainly have to pay capital gains tax on any gains you make when you sell it.
The tax office considers a second home to be an investment.
Therefore, if you see its value go up while you own it, you have to pay capital gains tax on your profits when you sell it. Basic rate taxpayers are charged 18% and higher rate taxpayers pay 28% on the profits.
Let’s say you’ve sold a second home and made £40,000 profit. You need to deduct the capital gains tax allowance of £12,300 bringing the amount to £27,700. If you’re a basic rate taxpayer You pay 20% on this and be left with a capital gains tax bill of £5,400.
What about 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 capital gains tax to pay at that point. But the value of the home is 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 likely be liable for capital gains tax 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.
What is the capital gains tax on a gift of property to a child?
If you give a property to a child, there’s normally no capital gains tax to pay at that point.
If that then becomes their main residential home, they won’t pay capital gains tax when they sell it.
But if it’s not their main residential home and they later sell it, they need to pay capital gains tax 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 decide to sell it, remember to remove it from the policy.
Cover for expensive items could raise your home insurance costs, so removing it after you sell could help keep it down.