Understanding Capital Gains Tax
Like all forms of tax, Capital Gains Tax can be a complicated issue. Here, we’ll cover the basics to help you understand when you may need to pay Capital Gains Tax, how to calculate it and what the current rates are.
What is Capital Gains Tax (CGT)?
Capital Gains Tax is charged when you sell, give away, exchange or otherwise dispose of an asset, from which you make a profit or ‘gain’. The tax is charged not on the full amount of money you receive as a result of the sale, but on the profit you make.
An asset refers to property, shares in a company or other possessions such as artwork or jewellery. You must have held the asset for over a year in order to be liable for CGT when you sell it.
Some assets are exempt from CGT. These include private motor cars, including vintage cars, charitable gifts, prizes and betting winnings, cash, and stocks and shares held in an ISA.
When does CGT apply?
There are a number of circumstances in which CGT applies. If you are a UK resident, for example, you may be liable for CGT when you dispose of assets located anywhere in the world, not just on UK-based assets. Non-UK residents may be liable for CGT if they dispose of UK land or property . If you give an asset as a gift, you may also need to pay CGT. How much you pay depends on when the gift was given and the recipient.
How do I calculate my CGT?
Typically you calculate Capital Gains Tax by taking the proceeds from the sale (or the market value upon disposal) and then deducting the following:
- Original cost or market value upon acquisition
- Incidental costs of purchase
- Costs incurred through improving the asset (such as renovations to a property)
- Incidental costs of sale (such as legal fees)
For example, Amy buys a holiday home for £150,000. Ten years later, she sells it for £250,000. During ownership, she had paid £20,000 for an extension and her total legal and estate agent fees for the initial purchase and subsequent sale came to £6,000. Her expenditure, then, is £26,000.
£250,000 – £150,000 = £100,000
£100,000 – £26,000 = £74,000
Amy’s chargeable gain is £74,000.
What is the new Capital Gains Tax rate for 2023?
Every tax year, most individuals living in the UK are given a Capital Gains Tax allowance. This enables them to dispose of a certain value of assets before becoming liable for CGT. This is known as the annual exempt amount (AEA). In the 2022/23 tax year, this amount was £12,300. However, the government significantly reduced the CGT allowance for 2023/24, and it currently sits at £6,000. There is some expectation that the allowance will be further reduced to £3,000 in 2024/25.
Unused CGT allowance cannot be carried forward or back, but each spouse or civil partner gets their own AEA.
What rate is CGT charged at?
Capital Gains Tax rates differ according to the type of asset you have disposed of and which tax band the gain falls into when it’s added to an individual’s taxable income.
Broadly speaking, CGT is charged at either 10% or 18% for basic rate taxpayers. For higher or additional rate payers, it’s either 20% or 28%.
The complexity of CGT means it is advisable to seek assistance from a Capital Gains Tax accountant when disposing of an asset. At Ibiss and Co, our specialists can ensure you pay the correct amount of tax. Contact us in Barking, Tooting and Walsall, to discuss your circumstances.