Capital Gains Tax (CGT) is a tax on the profit when you sell an asset that has increased in value. The tax is only applicable on the gain, not on the full value.
CGT brings in more money for HMRC than Inheritance Tax and in the 2019/20 tax year, receipts exceeded £9.9 billion.1
Capital Gains Tax is complex, and it can be difficult to calculate gains and losses. Incorrect disclosure can lead to large fines.
Failing to plan for Capital Gains Tax can create a bigger Inheritance Tax liability on your estate. Gains from almost any kind of personal possessions can be liable to Capital Gains Tax, including shares that are not held in a pension or ISA wrapper, buy-to-let properties, jewellery, artwork and coins.
Find out more about tax planning
What is the Capital Gains Tax exemption?
The annual exempt amount is currently £12,300 for individuals in the 2020-21 tax year. Any gains up to this amount do not incur Capital Gains Tax. This allowance cannot be carried over to the next tax year, so you should try to utilise the allowance on an annual basis to reduce your overall CGT bill.
How much is Capital Gains Tax?
The rate of Capital Gains Tax depends on your other income.
If you are a basic rate taxpayer and the gains on any assets sold come within your basic rate band, you’ll pay 10% for most assets and 18% on residential property.
If your combined income and gains are above the basic rate Income Tax threshold, you’ll pay 20% for most assets and 28% on residential property.
Are any assets free from Capital Gains Tax?
Assets held in a pension or ISA wrapper are exempt from Capital Gains Tax. If you sell your car or the home you live in, no tax must be paid.
However, if you used the property for business, let it out or you are a selling a second home then you will be liable to pay CGT.
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What is bed and ISA?
Bed and ISA is when you sell your investments and buy them back immediately inside of a tax-efficient ISA wrapper. This is a way to use your annual ISA allowance and make your portfolio more tax-efficient because any future gains within the wrapper will be free of CGT. You can also do this with a pension.
How can I reduce my Capital Gains Tax bill?
Transferring or selling assets to a spouse/civil partner doesn’t cause any CGT liability and means you can take advantage of your combined CGT allowances.
The rate of CGT that you are liable for depends on your Income Tax rate. You can reduce your Income Tax rate by making contributions to a registered pension scheme.
What do I do if I make a loss on an asset?
If you make a loss when selling an item, you can deduct the loss from a gain you made on another item.
You can carry forward losses that haven’t been used to offset gains for up to four years. Even if you do not owe any CGT that tax year, you should record losses on your tax return to make it easier to reclaim in the future.
You can also deduct costs related to improving your assets such as making improvements to your holiday home.
Top tips to reduce your CGT bill
- Utilise your annual CGT allowance to offset any gains, your allowance cannot be carried forward.
- You can utilise combined allowances by transferring assets to your spouse or civil partner.
- Reinvest your assets inside an ISA to stop further CGT.
Start tax planning today
At Four Wealth Management, a financial adviser can help you to utilise all of your tax allowances and plan your finances tax-efficiently to reduce the amount of tax you owe.
Book a no-obligation zoom meeting/phone call with a financial adviser on 0117 973 0500 or leave us a message online.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.
1 Statistica, ‘Capital gains tax receipts UK 2020’
