Capital Gains Tax
What is Capital Gains Tax?
Essentially capital gains are profits you make on 'assets' you've sold. Assets can be all kinds of things - from houses and jewellery to stocks and shares. HMRC looks to tax you on the 'gain' you make when you sell these assets as Capital Gains Tax.
Two things are important to note about Capital Gains Tax. Firstly it's a tax on the gain you make, not the total amount you sell something for. Secondly, not every gain you make is subject to this tax – there are some exceptions. You only pay Capital Gains Tax on the gain when you sell:
- Personal possessions worth £6,000 or more, with the exception of your car.
- Property that is not your main home – such as holiday homes, buy-to-let, land, business premises etc.
- Your main home if you’ve let it out (this does not include having a single lodger), it's used for business or it's more than 5,000 square metres.
- Shares that aren’t in an Individual Savings Account (ISA) or a Personal Equity Plan (PEP).
- Business assets such as land, buildings and shares.
For full and complete definitions of these descriptions, its best to go direct to HMRC’s website.
When do I not have to pay Capital Gains Tax?
All UK tax-payers are entitled to an annual tax-free allowance (also known as Annual Exempt Amount - AEA) before they pay Capital Gains Tax. Check with HMRC what the current rate is, but for 2020/21 it is £12,300 (2019/20 it was £12,000). This means you can make a gain on any relevant investment, or sale of any personal possession and the first £12,300 of that gain will not be subject to tax.
You usually do not pay tax on any gifts between spouses, civil partners, or when you make a gift to a charity – irrespective of how much you gift. Gifts to others may be still subject to tax, but check with HMRC.
Any gains made from the following are also not subject to Capital Gains Tax:
- ISAs or PEPs.
- UK government gilts (including Premium Bonds).
- betting, lottery or pools winnings.
How much is Capital Gains Tax?
A good question. The rate you pay will depend on
- the size of the gain
- your taxable income, and
- whether the gain is from residential property or other assets.
To find out how much Capital Gains Tax you might have to pay, we recommend visiting the Gov.uk webpage.
What happens if I didn’t buy the asset?
If you have inherited an asset, or it’s a gift from someone then you won’t be able to calculate the ‘profit’ you’ve made since purchase. The HMRC therefore asks you to use the ‘market value’ for an item, where the market value is defined as:
Finding the market value
|Situation||Use market value at|
|Gifts||Date of gift|
|Assets sold for less than they were worth to help the buyer||Date of sale|
|Inherited assets where you don't know the Inheritance Tax value||Date of death|
|Assets owned before April 1982||31 March 1982|
What about capital losses?
You can also, of course, make losses on assets that you may have bought. If this is the case, you can report it to HMRC to reduce the tax that you pay on your capital gains. Once you have reported it, HMRC will deduct this amount from the gains that you may have made in the same tax year.
Unused capital losses can be carried forward and used against capital gains in future years. Read more about this at www.gov.uk/capital-gains-tax/losses.