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Capital Gains Tax

What is it?

It's a tax on any gains you make when selling an asset for more than you paid for it. Taxable assets include items such as shares, unit trusts, land, property, antiques and art.

How much do I pay?

Capital Gains Tax (CGT) is paid on all gains you make, from selling assets over the course of a tax year, that exceed your annual allowance. The allowance for the current tax year is £12,300 and the rates are:

CGT rate Applies to
10% Basic rate taxpayers
20% Higher and Top rate taxpayers

The tax rates apply to all gains exceeding the allowance that fall into that tax band.

Candid Example Mr Profit sells some shares for £20,000 having bought them 10 years ago for £5,000, a gain of £15,000. After deducting his annual CGT allowance of £12,300, he's left with a taxable gain of £2,700. If it falls into his basic rate tax band he must pay 10% tax, i.e. £270. If it falls into his higher rate tax band he'll pay 20%, equal to £540. If it falls into both tax bands each part is taxed at the respective rate for that band.

Important points

  • If you are married, or in a civil partnership and living together, you can transfer assets to your husband, wife or civil partner without having to pay CGT.
  • If you give or sell assets cheaply to your children, or others, you must still calculate any gains (and pay CGT) based on the market value of those assets.
  • If you are given or inherit an asset and later sell it, any gain will be based upon the market value of that asset at the time you received it.
Candid Example Mrs Generous gives her daughter a painting worth £15,000, which she originally bought for £3,000. For CGT purposes this will be treated as a gain of £12,000, on which Mrs Generous is liable to pay tax.

Which assets are not subject to CGT?

You do not have to pay CGT on the following:

  • Your home, provided it was your main residence.
  • Private cars.
  • Jewellery, paintings, antiques and other personal effects that are individually worth £6,000 or less.
  • UK Government stocks ('gilts').
  • Assets held in an Individual Savings Account (ISA) or pension.
  • Betting, lottery or pools winnings.
  • Gifts of assets to charity.
  • Venture Capital Trusts (VCT) and Enterprise Investment Schemes (EIS) - both are generally higher risk investments.
Candid Example Mr & Mrs Fine own a home where they live in London and a holiday home in Devon. If they sell the home in London, their main residence, there will be no CGT on the gain. However, their holiday home in Devon will be subject to CGT if they sell, unless they move there permanently having sold the London home and make it their new main residence.

Making best use of you CGT allowance

With a bit of careful planning it's possible to minimise the impact of CGT, or even avoid it altogether:

Use you annual allowance as regularly as is practical

Where possible it makes sense to 'strip out' gains from investments such as shares or unit trusts within your annual allowance rather than sit back and let a fat gain build up over a number of years - leaving you with a big tax bill when you eventually sell.

Candid Example Mr Active and Mr Lazy are both basic rate taxpayers and own a range of shares worth £10,000. After five years the shares have increased in value to £18,000 and after 10 years they're worth £26,000.
Mr Lazy doesn't touch the shares before selling in year 10 at a £16,000 profit. Because this is £3,700 above his annual CGT allowance he'll face a £370 tax bill.
Mr Active decides to sell the shares and buy shares in other companies after five years. The gain of £8,000 is within his annual allowance (he has no other gains that year) so there is no CGT to pay. He then sells the lot after 10 years and makes another £8,000 gain (as the purchase price was £18,000). Because this is within his annual allowance there's no CGT to pay.

Of course, it's not always practical to do this, maybe you don't wish to sell a particular share. But taking gains as you go along could save you a fortune in CGT over the course of your life.

Note: if you sell a particular share, you must wait 30 days before buying it back if you wish to 'trigger' the gain. This strategy therefore tends to work best when you sell shares in one company with the intention of buying shares in another.

Hold assets jointly

Because you and your spouse or partner both have individual annual CGT allowances, holding assets jointly allows you to benefit from using both allowances at the same time. Alternatively, you can transfer assets to your spouse if it helps to use their allowance.

A way to defer CGT

You can defer a CGT bill by investing the gain in the shares of an Enterprise Investment Scheme (EIS) qualifying company. The shares must be purchased within the period one year before or three years after the gain arose.

While this might seem attractive, EIS shares can be very high risk (they tend to be small, young companies) so tread very carefully when pursuing this route. No point deferring a gain if you lose your investment!

Entrepreneurs relief

If you sell all or part of your business, you could enjoy some CGT relief via an effective tax rate of 6% on the first £5 million of qualifying gains. This is a lifetime allowance, so once it's fully used (potentially by the sale of more than business) you can claim no further relief.

Entrepreneurs relief applies to trading businesses, excluding property letting (other than furnished holiday letting).

Capital Gains Tax Jargon

Here's some of the more common capital gains tax jargon you might come across:
