What Is Capital Gains Tax?

Capital gains tax (CGT) is an important element of the UK tax system, impacting anyone who profits from selling certain types of assets. Whether you are an investor or a homeowner, understanding CGT is essential to managing your finances effectively. Essentially, Capital Gains Tax is the tax on the profit made from selling an asset that has increased in value. This tax is applicable only on the gain, not the total amount received from the sale.

Knowing when CGT is applied can help with better tax planning. It comes into play when you sell, gift, exchange, or receive compensation for an asset. The rates of CGT vary based on your taxable income and the type of asset sold and everyone has an annual CGT allowance. This enables them to earn a certain amount of profit tax-free each year. 

We are going to take a deep dive into the specifics of CGT and offer practical tips on how to minimise your tax liability legally. This knowledge will equip you to optimise your financial outcomes and answer the question “What is Capital Gains Tax?”.

What is Capital Gains Tax?

Capital gains tax (CGT) is a tax on the profit made from selling or disposing of an asset that has increased in value. It is important to note that the tax is levied only on the gain, not the entire sale amount. For example, if you purchased an asset for £10,000 and sold it for £15,000, the capital gain would be £5,000, and this is the amount subject to CGT.

Assets subject to Capital Gains Tax include property (excluding your main residence), stocks and shares, business assets, and valuable personal items like jewellery and antiques worth over £6,000. However, certain assets are exempt from CGT, such as your primary residence, ISAs, and certain government bonds.

The tax is applicable when you sell, gift, exchange, or receive compensation for an asset. There are various reliefs and allowances designed to reduce the CGT burden. Each individual in the UK has an annual CGT allowance, known as the annual exempt amount (AEA), which allows them to make a certain amount of profit tax-free each year. For the tax year 2024/2025, this allowance is £3,000.

When Is Capital Gains Tax Applied?

Capital gains tax (CGT) is applied in the same tax year as you make the gain when you sell, gift, exchange, or receive compensation for an asset that has increased in value. CGT is payable on profits from the sale of properties, excluding your primary residence, which is generally exempt. Stocks and shares, excluding those held in tax-efficient accounts like ISAs, are also subject to CGT when sold.

Gifting assets can also trigger CGT if the asset has appreciated in value since you acquired it. However, there are exemptions for gifts made to your spouse or civil partner, as these transfers are not subject to CGT. Receiving compensation for assets, such as insurance payouts for damaged or lost items, can also attract CGT if the compensation exceeds the original purchase price of the asset. Knowing these conditions helps you make more informed decisions about managing and disposing of assets, optimising your tax position and avoiding unexpected tax liabilities. 

Capital Gains Tax Rates and Allowances

Capital gains tax (CGT) rates and allowances in the UK vary based on your overall taxable income and the type of asset sold. The CGT rates depend on whether you are a basic rate taxpayer or a higher/additional rate taxpayer. For the tax year 2024/2025, the rates are as follows:

• Basic rate taxpayers: 10% on most assets and 18% on residential property.
• Higher and additional rate taxpayers: 20% on most assets and 24% on residential property.

Calculating your CGT involves subtracting the original cost of the asset and any allowable expenses (such as legal fees and improvement costs) from the sale price. This gives you the gain, which you then compare to your annual allowance, which is £3,000 in tax year 2024/2025. The remaining amount is taxed at the applicable rate based on your income bracket.

By planning the timing of your asset sales and making use of available exemptions and reliefs, you can optimise your tax position and reduce your overall liability. This is where an experienced accountant can help you manage your tax liability with proper tax preparation service to minimise your CGT obligations.

What Is the 36 Month Rule for Capital Gains Tax?

The 36-month rule for capital gains tax (CGT) is particularly relevant for property owners who have moved out of their main residence. This rule allows you to claim Private Residence Relief (PRR) on a property you previously lived in as your main home for up to 36 months (three years) after you move out. This means that for those three years, you can still benefit from the tax-free status that your main home enjoys, even if you are no longer living there.

This rule can be especially useful if you have to relocate for work, move in with a partner, or need to care for a relative. You won’t immediately lose the CGT relief on your former home as long as the property was your main residence at some point. You can claim PRR for the final 36 months of ownership, regardless of whether the property is rented out or left vacant during this period. Understanding the specifics of this rule can help you avoid unexpected tax liabilities when selling a property. By strategically planning the sale of your property within this three-year window, you can maximise the relief available and minimise your CGT liability. 

Tips to Help You Save on Capital Gains Tax

Saving on capital gains tax (CGT) is possible by relying on a few strategies that will help you minimise your CGT liability in any tax year:

Utilise Annual Exemptions: Make the most of your annual CGT allowance, which for the tax year 2024/2025 is £3,000. This allowance is per individual, so couples can effectively double this amount by transferring assets between them.

Offset Gains with Losses: If you have made any losses on the sale of other assets, you can use these to offset your gains. This can reduce your overall taxable gain and, consequently, your CGT liability.

Consider Timing: Plan the timing of your asset sales. By spreading the sale of assets over multiple tax years, you can utilise multiple annual exemptions. If your income fluctuates, consider selling in a year when your income is lower to benefit from a lower tax rate.

Invest in ISAs: Assets held in Individual Savings Accounts (ISAs) are exempt from CGT. Investing through ISAs can be a highly tax-efficient way to grow your wealth.

Transfer to a Spouse or Civil Partner: Transfers of assets between spouses or civil partners are exempt from CGT. By transferring assets to a spouse or partner, you can make use of their CGT allowance as well.

Claim Reliefs and Exemptions: Familiarise yourself with various reliefs and exemptions such as Private Residence Relief, Entrepreneurs’ Relief, and Investors’ Relief. These can significantly reduce the amount of CGT payable.

Keep Detailed Records: Maintain thorough records of the purchase prices, sale prices, and any associated costs for all your assets. This means you can accurately calculate your gains and claim all allowable expenses.

Understanding capital gains tax (CGT) is essential for anyone dealing with valuable assets in the UK. Proper planning can significantly reduce your CGT liability, and strategies like making full use of annual exemptions and offsetting gains with losses can be very beneficial. 

To make the most of these strategies and stay updated on any changes to CGT rules, it is advisable to consult with an experienced tax full service accountant to make sure you satisfy your Capital Gain Tax obligations without overpaying. They can provide personalised advice tailored to your circumstances.