Capital Gains Tax is a tax that you will pay on the profit you make when you dispose of an asset which has increased in value. This doesn’t just apply to properties and when you sell a house fast or on the open market, it also applies to things like selling a business or other asset, also known as ‘disposing’ of an the amount of tax you will pay will depend on the asset itself, how much profit you make and your tax-free allowance.
What Is Capital Gains Tax?
Capital Gains Tax is the profit made when you dispose of an asset that has increased in value; in layman’s terms, it is the amount of profit you make by selling an asset that has appreciated in value. The gain that you make (the profit) is what is taxed, rather than the total amount of money you receive.
What Would You Pay Capital Gains Tax On?
When you sell the following items, you will pay Capital Gains Tax on the gain:
- Personal possessions which are worth £6,000 or more (excluding your car)
- Any property that is not your principal residence
- Your main home if you have used it as a rental property, for business purposes or if it is very large
- Shares that are not in a PEP or ISA
- Any business assets
All of these are ‘chargeable assets’ meaning that you will be required to pay a tax on the gain when you sell these items. However, depending on the asset, you could be able to benefit from a tax relief and reduce the amount that you need to pay. If you are getting rid of an asset which you jointly own with someone else, you will only need to pay Capital Gains Tax on your share of the gain.
When Are You Exempt From Paying Capital Gains Tax?
You will only need to pay Capital Gains Tax on total gains which exceed your annual tax-free allowance. Additionally, if you make any gifts to your spouse or to a charity, you will typically not need to pay tax on these. There are certain assets for which you are exempt from paying Capital Gains Tax including:
- Premium Bonds or UK government gifts
- ISAs or PEPs
- Winnings for betting, lottery or pools
Do You Need to Pay Capital Gains Tax if Someone Dies?
When someone dies and you inherit an asset, there will be Inheritance Tax which will need to be paid by the estate of the deceased. You will only need to pay Capital Gains Tax if you are later disposing of the asset.
What Are the Capital Gains Tax Rates?
You will only need to pay Capital Gains Tax on any overall gains that exceed your tax-free allowance. The Capital Gains tax-free allowance is £12,300 or £6,150 for trusts. Beyond this, the rates for 2022-23 for property are 18% as a basic-rate taxpayer or 28% if you are in a higher tax bracket. For other assets, basic-rate taxpayers will be charged a rate of 10% for Capital Gains Tax, or 20% for higher-rate taxpayers.
If you do not make full use of your Capital Gains Tax allowance in a given tax year, you are not able to carry it over to the next tax year.
What Happens to Jointly Owned Assets?
If you own any assets jointly with another person, you can both use your allowances which will effectively double the amount of profit that you can make before Capital Gains Tax is due. Similarly, if you are married or in a civil partnership, you can transfer assets to each other for free without incurring any Capital Gains Tax. Although, if you do this, you will be charged based on the gain made during the period that it was jointly owned rather than since the asset was passed on to your partner.