Capital Gains Tax - What Is It & Who Needs to Pay It

Catherine Alexander
Partner and Mortgage & Protection Adviser at GDA

Capital Gains Tax is a tax on the profit when you sell something that’s increased in value. For example, if you bought a painting for £5,000 and sold it later for £25,000, you’ve made a gain of £20,000 and would pay Capital Gains Tax (CGT) on that.

There are ways that the gain can be reduced, some assets are tax-free, and you can also utilise your tax-free allowance.

What you pay it on

• most personal possessions worth £6,000 or more, apart from your car

• property that’s not your main home

• your main home if you’ve let it out, used it for business or it’s very large

• any shares that are not in an ISA or PEP

• business assets

What you do not pay it on

• Gifts to your husband, wife, civil partner or a charity

• ISAs or PEPs

• UK government gilts and Premium Bonds

• betting, lottery or pools winnings

You only have to pay Capital Gains Tax on your overall gains above your tax-free allowance (called the Annual Exempt Amount).

The Capital Gains tax-free allowance is currently:

• £3,000

• £1,500 for trusts

You may also be able to reduce your tax bill by deducting losses or claiming reliefs. There are certain rules for calculating your CGT bill, you can do this yourself, or you can contact your financial adviser who will be able to guide you through the process.

Do you have to pay CGT?

To work out if you need to pay CGT, follow the three-step process below:

1. Work out the gain for each asset (or your share of an asset if it’s jointly owned). Do this for the personal possessions, shares or investments , UK property or business assets you’ve disposed of in the tax year.

2. Add together the gains from each asset.

3. Deduct any allowable losses.

How do you pay CGT?

You do not get a bill for Capital Gains Tax, so you have to work out whether you need to pay any CGT and pay any money you owe by the deadline to HMRC. For example, if you sold a residential property in the UK with a completion date on or after 27 October 2021 you must pay any CGT owed within 60 days. For other types of gains, you need to pay any CGT owed in the tax year after you sold or disposed of an asset if you use a Self Assessment tax return. If you’re eligible, you may be able to use the ‘real time’ Capital Gains Tax service to report by 31 December in the tax year after the sale.

This article isn’t personal advice. If you’re not sure whether a course of action is right for you, ask for financial advice.