Capital Gains Tax (UK)

3 Key Takeaways

• Capital gains tax is a tax on the profit made from selling an asset that has appreciated in value.
• The rate of CGT varies depending on your income tax band and the type of asset sold.
• There is an annual tax-free allowance for capital gains, currently £6,000 for the 2023/24 tax year.

What is Capital Gains Tax?

Capital gains tax is a tax on the gain you make when you dispose of an asset that has increased in value. Disposal can include selling, gifting, transferring, or exchanging the asset. The tax is calculated on the difference between the sale price and the original purchase price, minus any allowable expenses.

Importance of Capital Gains Tax

• Government Revenue: CGT is a significant source of revenue for the government, contributing to funding public services and infrastructure.
• Fairness: It is considered a fairer tax compared to income tax, as it targets profits rather than income earned from work.
• Economic Impact: CGT can influence investment decisions, as investors may consider the potential tax implications before selling assets.

How Capital Gains Tax Works

The rate of CGT you pay depends on your income tax band and the type of asset sold. For the 2023/24 tax year, the rates are:

• Basic-rate taxpayers: 10% for most assets, 18% for residential property
• Higher and additional-rate taxpayers: 20% for most assets, 28% for residential property

You can deduct allowable expenses from your capital gain, such as the original purchase price, solicitor’s fees, and stamp duty. You also have an annual tax-free allowance, meaning you don’t have to pay CGT on gains up to this amount.

Examples of Capital Gains Tax

• An investor buys shares for £10,000 and sells them for £15,000. Their capital gain is £5,000, and they would pay CGT on this amount, depending on their income tax band and whether they have used their annual allowance.
• A homeowner sells their second home for £300,000, which they bought for £200,000. Their capital gain is £100,000, and they would pay CGT at the applicable rate for residential property.

Real-World Application

Capital gains tax affects a wide range of individuals and businesses in the UK. Understanding how CGT works is crucial for anyone who owns assets that could increase in value. By planning and considering the tax implications, individuals and businesses can make informed decisions about when and how to dispose of their assets.