Capital gains tax (CGT) is a tax that is applied to any profits you make when you dispose of something you own for more than £6,000. This can be by selling the item or swapping/giving it away. It is the gain you make that is taxed, not the amount of money received.
This can include:
Personal possessions (apart from your car)
A second property or buy-to-let (but not your main home)
Shares that are not in an ISA or Personal Equity Plan (PEP)
Every year, individuals are granted an 'annual exempt amount'. You only have to pay capital gains tax on your overall gains above your tax-free allowance.
For the 2021/22 tax year the individual capital gains tax-free allowance is £12,300. For couples that are married or in civil partnerships, the allowance is £24,600. You cannot carry any unused allowance forward to the next year.
Couples who are married or in a civil partnership are free to transfer assets to each other without being charged CGT.
There are actually two different CGT rates, one that applies to property and one for other assets.
The CGT rates you pay depends on which tax bracket applies to you. For the 2021/22 tax year the rates are as follows:
|CGT rate on assets||CGT rate on poperty|
|Basic rate payer||10%||18%|
|Higher or additional rate payer||20%||28%|
Yes. Any costs incurred in the purchase or sale, or any money spent on improving the assets can be deducted from your capital gains before CGT is applied.
For example, if you spent money on renovating the kitchen before you sold a property, you can deduct the cost from the profit before you apply CGT.
Even if you're a basic-rate taxpayer (20%), a large enough capital gain could push you into a higher-rate tax bracket. This means that you pay the higher rate of CGT on the amount that takes you over the threshold.
Follow these steps to calculate your capital gains tax bill:
Work out how much taxable income you've earned from your salary or other types of income. Your taxable income is your gross salary minus your tax-free personal allowance (£12,570 in 2021/22 for basic rate payers).
Now you can calculate your taxable capital gains by deducting the tax-free CGT allowance (£12,300 in 2020/21) and any costs incurred in selling or improving the asset from your profits. Then sum leftover is the amount on which you'll be charged CGT.
Add your taxable capital gains to your regular taxable income. If you're a basic-rate taxpayer, £37,700 is the maximum you can earn for the 2020/21 tax year. Any income above this will be taxed at the higher rate. Add your taxable income and capital gains together. If the total is less than £37,700, you’ll pay basic-rate (10%) CGT. If the total pushes you over a higher tax threshold, you’ll pay the basic rate on the portion up to the threshold and the higher rate (20%) on the rest.
If you make a loss on the sale of an asset, you can report it to HM Revenue and Customs (HMRC) and deduct it from your total taxable gains. These are known as ‘allowable losses’.
If your capital gains still push above the annual exempt amount, you can deduct any unused losses from previous tax years.
You can report your loss in your tax returns. If you aren't registered for Self Assessment, you can write to HMRC instead.
Be aware that it's not necessary to report your losses right away. You have four years after the end of the tax year in which you sold the assets to report any losses.
If you sold a second property/Buy to Let in the UK on or after 6 April 2020, you must report and pay any CGT due using a capital gains tax on UK property account within 30 days of selling it. However, if you sold a property on or after 27 October 2021, your CGT bill must be paid within 60 days.
If you fail to report any gains on UK property within these deadlines, you may have to pay a penalty.
For anything else, you must report the gain by 31 December in the tax year you made it. HMRC will send you a letter or email with a payment reference number explaining how to pay. Alternatively, you can report your gains in your self-assessment tax return in the tax year after you disposed of the asset.
Salman is our personal finance editor with over 10 years’ experience as a journalist. He has previously written for Finder and regularly provides his expert view on financial and consumer spending issues for local and national press such as The Express, Travel Daily, and The Daily Star.