The Capital Gains Tax Guide for the UK

Introduction

Anyone looking to make any sort of investment at all in their life will likely have to pay capital gains tax in one form or another (presuming the investment goes up, that is!). It's therefore vital to understand what it is, how it's calculated and how to manage it alongside income tax and other forms of tax you'll be paying throughout your investing life. Your taxable income is not the only way of calculating what capital gains tax is liable!

Capital gains tax can be complex and confusing, so we're here to help. In this blog post, you will find an easy-to-follow guide that explains all the basic principles of capital gains tax.

We hope you find it useful for making informed decisions about your investments in a timely manner and with minimal effort! Read on if you want to learn more about capital gains tax in the UK - its rules, its implications, and how best to avoid or reduce liability where applicable.

Overview of Capital Gains Tax, UK

What is Capital Gains Tax?

Capital Gains Tax is financial levy is imposed on the profit earned from the sale of an asset, such as property, shares, or personal possessions that exceed a certain value threshold. This means that if you buy an asset for £100 and sell it for £150, the £50 gain you've made is liable for tax at the point of sale.

So you only pay the tax on the gain when you sell it, which of course makes sense else you'd be paying tax on money you don't actually have. Asset values fluctuate too, so it only makes sense to pay capital gains tax on things when you see value from them.

You can find a basic guide to capital gains tax on the UK Government website

What makes it particularly fascinating is that the tax rates and applicable allowances can vary among taxpayers, which are primarily determined by factors such as the type of asset and the individual's tax band. Additionally, as the tax landscape is subject to change, it necessitates that taxpayers and investors remain vigilant - staying informed about potential updates or policy modifications.

You need to know how to spread your assets and the proceeds from those assets across income, capital gains and dividends in order to make the most of your respective allowances.

The capital gains tax allowance in particular is an important one, and we'll come on to exactly how to make the most of this below.

Assets Subject to CGT

Capital Gains Tax (CGT) is imposed on the growth in value of assets when they are sold or otherwise disposed of, representing a crucial component of tax obligations for individuals and businesses alike. While various assets are eligible for CGT, understanding which ones are subject to this tax and how to manage them effectively is essential to ensure compliance and minimise tax liability.

Among the assets that can trigger CGT include, but are not limited to, real estate properties, shares, and collectibles. Additionally, more niche areas such as cryptocurrencies, personal use assets, and business-related assets can also come under the umbrella of CGT.

Being well-versed in the scope of assets subject to CGT empowers individuals and businesses to make informed decisions about their investments, property ownership, and tax planning strategies, ultimately driving financial success and long-term stability.

Calculating Your Tax Liability

Taking the time to calculate your tax liability can be a daunting but essential task, as it allows you to plan your finances accordingly and avoid any unpleasant surprises come tax season, when it's time to pay capital gains tax. You're probably already aware on the procedure for taxable income, not least as this is usually done by PAYE, but here in particular, making the most of your capital gains allowance.

Here are the Capital Gains tax rates for the 2024/2025 tax year:

• 0% - for the first £3,000 (known as the capital gains allowance). This has just fallen from £6,000 in  2023. It cannot be carried forward - use it or lose it!
• 10% - where the total taxable gains and income are less than £37,700
• 20% - everything in excess of the above.

It might also be helpful to use our handy Investment Returns Calculator to figure out what you might owe in future.

What about Property?

The 10% and 20% capital gains tax rates also apply to gains on commercial property, but gains on residential property (except your main residence, which is exempt) are taxed at the higher rates of 18% and 28% for the two bands.

Reducing Your Liability

Gaining insights into your tax responsibilities might even reveal potential opportunities for reducing your overall liability through deductions or tax credits. The process typically entails gathering relevant financial documents, analysing different sources of income, and determining applicable tax rates based on your jurisdiction and circumstances.

Additionally, leveraging the expertise of tax professionals or utilising user-friendly tax software can ensure accuracy and ease in this crucial endeavour. Ultimately, proactive and informed tax management can lead to better financial planning and a more confident approach towards your fiscal obligations and taxable income.

There aren't really platforms that automatically calculate your tax liability, but by tracking your assets in a portfolio tracker like ours, you'll be able to safely estimate what you might owe in capital gains tax across asset classes with ease.

Crystallising your gains and using capital losses

So where does this leave us with regards to managing your assets tax efficiently? Well, the most efficient way to manage capital gains tax is by not having to pay it! You should be maximising your ISA allowance and your matched pension contributions before investing in a standard taxable investment account.

So really, even if your employer doesn't have a pension scheme, you have your full ISA allowance at £20k/year, and your capital gains tax allowance at £12,300 (of gain!) to realise before you have to think about paying capital gains tax. To make more than £12,300 a year of gain, your portfolio will likely have to be in excess of £100k.

So really, until you have a £100k+ portfolio which you're contributing to at a rate of more than £20k/year, you shouldn't have to worry too much about paying capital gains tax. To make sure of this, you should be realising your gains each year.

What does this mean? Well, as we discussed, you have to actually sell the asset to pay the tax (or use the allowance). So ideally you'll be selling assets with exactly £12,300 of gain each year, in order to maximise the allowance.

Capital Losses

You can also offset capital losses against capital gains in the same year. Unused losses are carried forward indefinitely and can then be offset against future gains, which requires a formal claim to be submitted to HMRC.

Bed and Breakfast

So you can sell them on the last day of the tax year, realise the gain and re-buy them back again the next day and you've reset the tax liability to 0, right? Well, not quite. This is called "bed and breakfasting" and since 1998 it hasn't been allowed. You have to wait 30 days before rebuying the same stocks or funds.

What you can do, however, is Bed and ISA. You can sell the stocks, realise the gain and then re-buy them in your ISA to effectively continue your position. You can also wait 30 days, which shouldn't be too onerous on performance.

Business Asset Disposal Relief

BADR was formerly know as Entrepreneurs relief, and applies to the selling of a business. Here, a flat rate of 10% is applied, presuming the business owner is a sole trader or business partner, and has been for at least two years. It also can be affected by their marginal income tax rate, as with their normal capital gains tax bill.

Businesses should regularly review their BADR position, as it is increasingly easy to fall foul of the detailed rules.

What Exemptions and Reliefs Are Available for Capital Gains Tax ?

Capital gains tax can often be a concern for many individuals who are considering the sale or disposal of an asset. However, it is important to be aware of the various exemptions and reliefs that may be available to help reduce or even eliminate this financial burden. Some of these include the annual exemption, which allows individuals to make a certain amount of gains each year without having to pay tax on them, and residential property relief.

Your main residence

Interestingly enough, you don't have to pay capital gains tax on your home. This applies to a main residential property that has not been used to generate income throughout ownership, either through a rental or as a place of business.

This is known as the principal private residence relief. Residential property used for the purpose of making money will be liable to pay CGT.There are also a variety of entrepreneur and investor reliefs designed to encourage business growth and investment.

One of our favourites is the EIS scheme, used to stimulate investment in startups in the UK. An EIS scheme is a package of startup investments (usually 8-10) run by one specific fund. Investments made in an EIS are not liable for capital gains tax or inheritance tax at any time, and provide tax relief on income too at 30%. So a 30k investment would give you a £9k income tax credit, applicable to be backdated 3 years, rather than just the year in which you currently pay income tax.

Moreover, certain gifts between spouses, civil partners, or to charities may also be exempt from having to pay capital gains tax.

It is vital for individuals to carefully assess their personal circumstances and financial goals in order to determine the most suitable exemptions and reliefs, potentially making significant savings in the long run. You should be wary when gifting assets to your partner for tax purposes, especially when these assets provide income.

Filing and Paying Your CGT

Navigating the complexities of Capital Gains Tax (CGT) can often be overwhelming, but understanding the process of filing and paying your CGT is crucial to complying with your financial obligations.

Whether you've sold a property, shares or even personal assets, acknowledging the potential tax implications is the first step in safeguarding your wealth.

Preparing in advance by tracking sales, calculating gains and losses, and seeking expert advice may save you from unwanted surprises. You would be surprised at how manageable it is to file a tax return and pay capital gains tax yourself - the difficult part is in collecting the information applicable from the relevant year in order to calculate capital gains tax itself.

By familiarising yourself with the CGT system and ensuring timely submissions, you can gain the confidence to handle any unexpected sale-related taxes, supporting both your short-term needs and long-term financial goals.

What to Do If You Have Omitted Income or Overstated Losses on Your Tax Returns

Discovering that you have omitted income or overstated losses on your tax returns can initially be a nerve-wracking experience. However, it is crucial not to panic, and instead take proactive steps to rectify the situation.

Firstly, gather all the necessary documentation to support the corrections, such as receipts, invoices, and bank statements. Once you have compiled the required information, promptly submit an amended tax return to the relevant tax authority.

Filing an amended return not only demonstrates good faith on your part, but it also decreases the likelihood of incurring penalties and interest for the inaccuracies.

Furthermore, consider seeking professional tax advice to ensure that you fully understand the implications of the revisions and to minimise the chances of future errors.

Taking swift action to correct any mistakes on your tax returns can help you reduce the financial impact and maintain a favourable relationship with tax authorities.

Capital Gains on the Strabo Dashboard

All in all, capital gains tax is complicated – but it doesn't have to overwhelm you. By taking time to familiarise yourself with the key components and understand your own obligations, you can ensure that you comply with UK law and take advantage of any possible exemptions or reliefs.

For further guidance on CGT, taxable income and other tax compliance topics, try signing up to the Strabo platform.

The Strabo platform gives you the opportunity to track the growth of all of your assets, both those that sync automatically to the platform and the manual inputs, with associated growth rates, of your other assets. You are able to separate taxable and non-taxable accounts, tag specific groups and manage growth so that you always know how much tax there is to pay whe then end of the year arrives.