What is Capital Gains Tax (CGT), and When Do You Need to Pay It?
1. What is Capital Gains Tax (CGT)?
Capital Gains Tax (CGT) is a tax on the profit (gain) made when selling or disposing of an asset that has increased in value. The tax applies only to the gain, which is the difference between the purchase price and the sale price, not the total sale amount.
2. When Do You Need to Pay CGT?
CGT applies when you sell, give away, or dispose of certain assets, including:
- Property that is not your main home
- Shares and investments (outside of ISAs or pensions)
- Business assets when selling part or all of a business
- Valuable items such as paintings, antiques, and jewellery worth more than £6,000
- Cryptocurrency when converted to cash, used for purchases, or exchanged for another cryptocurrency
Certain transactions are exempt from CGT, including:
- The sale of your main home, if it qualifies for Private Residence Relief
- Investments held in ISAs or pensions
- Gifts to a spouse or civil partner
- Personal belongings worth less than £6,000, except for specific assets like antiques and collectibles
3. How Much CGT Do You Pay?
The CGT rate depends on taxable income and the type of asset being sold.
CGT Rates for 2024/25
| Taxpayer Type | Residential Property | Shares & Other Assets |
|---|---|---|
| Basic Rate (Income up to £50,270) | 18% | 10% |
| Higher/Additional Rate (Income above £50,270) | 24% | 20% |
For business owners selling business assets, Business Asset Disposal Relief (BADR) may apply, reducing the CGT rate to 10 percent.
4. Capital Gains Tax Allowance (CGT Exemption)
The UK government provides an annual CGT allowance, meaning you only pay CGT on gains that exceed this threshold.
- The CGT allowance for 2024/25 is £3,000 per person.
- If gains are below this threshold, no CGT is due.
- Spouses and civil partners can combine allowances, allowing up to £6,000 of tax-free gains on jointly owned assets.
5. How to Calculate CGT Liability
Example 1 – Selling a Buy-to-Let Property
- Purchased for £200,000
- Sold for £280,000
- Gain = £80,000
- Deduct CGT Allowance (£3,000) → Taxable Gain = £77,000
- If taxed at the higher rate of 24 percent, the CGT bill would be £18,480
Example 2 – Selling Shares
- Purchased for £10,000
- Sold for £25,000
- Gain = £15,000
- Deduct CGT Allowance (£3,000) → Taxable Gain = £12,000
- If taxed at the basic rate of 10 percent, the CGT bill would be £1,200
6. How and When to Pay CGT
For Property Sales:
- Report and pay CGT within 60 days of completing the sale using HMRC’s online CGT on UK Property Service.
For Other Assets (Shares, Business, etc.):
- Report gains through the Self-Assessment Tax Return.
- The deadline is 31 January following the tax year in which the gain was made.
Failing to report CGT on time can lead to penalties and interest charges.
7. How to Reduce CGT Liability
- Use the CGT Allowance of £3,000 per person before selling assets.
- Transfer assets to a spouse or civil partner before selling to maximise allowances.
- Claim Business Asset Disposal Relief (BADR) to benefit from a lower 10 percent tax rate.
- Offset capital losses against gains to reduce taxable profit.
- Invest through ISAs or pensions to avoid CGT entirely.
8. Final Thoughts
Capital Gains Tax can be a significant expense, but with careful planning, it is possible to minimise tax liability. Those selling property, shares, or business assets should calculate their CGT obligations carefully and ensure timely payment to avoid penalties.
For personalised advice on CGT planning and tax-saving strategies, contact Merranti Accounting.
