How is capital gains tax calculated?

29 Sep 2023 | Tax

Understanding how capital gains tax (CGT) works is essential for anyone who holds investments or assets of various kinds, including property and business assets. So how is capital gains tax calculated?

New CGT rules rolled out in April 2023, with more planned for next year, so it’s essential to be aware of how these shifts might impact your financial obligations.

How is capital gains tax calculated?

CGT is tax applied to the profit when you sell or ‘dispose of’ an asset that has appreciated in value. The key to understanding CGT is recognising that it doesn’t tax the total sale but focuses on the ‘gain’ or profit made from that sale.

In cases where you dispose of an asset, the gain is calculated based on the market value at the time you disposed of it. This means that CGT still applies if you gift a property that has increased in value – unless you gift it to your spouse or civil partner.

How much do I need to pay?

CGT is charged at different rates depending on your tax bracket and the asset you’re selling or disposing of. For the 2023/24 tax year, the CGT tax structure is as follows:

  • Individuals with annual incomes less than £50,270 must pay 10% CGT on all capital gains, except residential properties, which are taxed at 18%.
  • Individuals with annual incomes higher than £50,270 must pay 20% CGT on their capital gains, with residential properties taxed at a steeper rate of 28%.

You also receive an tax free allowance each year, known as the Annual Exemption Allowance (AEA). This is the amount you can gain from the sale of assets without being liable for CGT.

In 2022/23, this threshold was set at £12,300. In April 2023, however, the allowance decreased to £6,000, with a further reduction to £3,000 slated for April 2024.

Let’s say you bought a painting for £5,000 and later sold it for £25,000 — that means you’ve made a gain of £20,000. If this is your only gain in the 2023/24 tax year, you’ll usually need to subtract your £6,000 AEA to calculate your total taxable gain — in this case, £14,000.

You’ll then need to calculate your capital gains liability based on your tax bracket.

Which assets fall under CGT?

Many different types of assets can fall under CGT. Collectively, assets that are subject to CGT are termed ‘chargeable assets.’

Some of the most common include:

  • Personal possessions: You’re usually liable to pay CGT on gains you make from most personal possessions worth £6,000 or more. One notable exception, however, is your car; you don’t owe any CGT when selling it.
  • Property: CGT comes into play if you sell a property that is not your primary residence. You usually do not have to pay CGT on your main home, except in specific circumstances (for example, if it occupies a large piece of land).
  • Shares: Most shares outside of ISAs or PEPs are subject to CGT.
  • Business assets: If you sell or dispose of assets related to your business, CGT may apply.

If you jointly sell an asset with someone else, you’re only responsible for CGT on your part of the profit or ‘gain’.

Exceptions in CGT Rates

Some assets are exempt from CGT, most notably the sale of one’s primary residence which is exempt subject to certain conditions.

There are other exclusions:

  • assets you gift or sell to your spouse or civil partner
  • assets you give to charity
  • profits from ISAs or PEPS
  • earnings from UK Government gilts and premium bonds
  • winnings from betting, lotteries or pools

Some some share sales relating to HMRC-approved schemes are also exempt, such as the Enterprise Management Incentive (EMI).

Capital losses and reliefs

If you make a loss when selling an asset, you can report this loss to HMRC to potentially reduce your total taxable gain.

But be aware – you cannot claim a loss if you’ve disposed of the asset to a spouse, a family member or a connected person like a business partner.

Summary: how is capital gains tax calculated?

Understanding how CGT is calculated and the implications of these calculations can significantly influence financial decision-making.

Remember, CGT allowances are set to reduce again next year, so there may be scenarios where it’s wise to sell your assets while we still have a higher £6,000 limit.

CGT is important to get right. If you want to stay compliant and make the most of your assets, you should seek professional support. As expert personal tax planning accountants, we can help you stay on top of your CGT liabilities.

Get in touch to find out more about our tax planning services.