Capital Gains Tax (CGT) is a tax on the profit (the gain) that you make when ‘disposing’ of an asset which you own. Disposal of an asset usually means that it’s been sold, but it can also mean giving it away, swapping it for something else, or receiving compensation for its loss.
Capital Gains Tax normally only applies to individuals, or where there’s no legal distinction between you and your business.
For instance sole traders or someone in a partnership can be liable for CGT. An incorporated business (such as a limited company) will pay Corporation Tax on any profit it makes from disposing of a business asset.
Capital Gains Tax can get a bit complicated, so in this post we’ll take you through the basics and give you some simple scenarios to show you how it works.
Most of us won’t need to think about Capital Gains Tax that often, but if you dispose of a valuable asset it might cross your radar. The most frequent questions around Capital Gains Tax relate to houses and cars.
Will I need to pay Capital Gains Tax when I sell my house?
Property prices have risen rather dramatically over the years, so the sale of your house might mean a very substantial gain indeed. The good news is that you won’t normally need to pay Capital Gains Tax on property as long as:
It’s your only home, which you’ve lived in as your main residence for all the time you’ve owned it
You haven’t let part of it out (not including having a lodger)
You haven’t used part of your home exclusively for business purposes (using a room as a temporary or occasional office does not count)
The grounds, including all buildings, are less than 5,000 square metres (just over an acre) in total
You didn’t buy it with the aim of making a gain
Do I need to pay Capital Gains Tax if I sell my car?
If you’re lucky enough to make money on the sale of your car, then you won’t pay Capital Gains Tax on this as long as it has not been used for business purposes.
This goes for classic cars too. So, if you have an E-type sitting in the garage, you can decide to sell it and release the massive gain it has made over the last few years, without getting clobbered by tax.
What assets are exempt from Capital Gains Tax?
The key here is what the asset was used for, and how much you get when you dispose of it. Any profit on selling your car is exempt from Capital Gains Tax as long as the car wasn’t used for business. Your main home that you own is usually exempt too, as are:
Gifts to a registered charity
Gifts to a spouse or civil partner
Investments in PEPs or ISAs
UK government gilts and Premium Bonds
Competition, betting, lottery, or pools winnings
Do be aware though that just giving away something (unless it is to your spouse or a charity) will be treated exactly like selling it, and you’ll need to declare the value at the time of sale.
Sensible tax planning is perfectly acceptable, but we’d never advise people to try and pull the wool over HMRC’s eyes. They have seen it all before!
Capital Gains Tax for businesses
If your business is a limited company, then it won’t pay Capital Gains Tax. Instead, any gains are taxed as Corporation Tax. It’s a bit different if you operate as a sole trader or partnership though.
Because there’s no legal distinction between you and your business, any gains the business makes are considered ‘yours’. As such you’ll need to include capital gains as part of your Self Assessment tax return.
Whilst a sole trader will be responsible for all of the gain that they make, partners will only need to work out their share of each gain or loss according to their share in the partnership.
The first are assets that they use for trading. This might include things like stock that you sell to customers, raw materials to create products, or working capital.
In accounting terms, these are seen as things that will be used up within the next 12 months, so although they are assets, they are short-term in nature.
From a taxation point of view, these short-term assets form part of the trading of the business. If the business makes a profit when it comes to sell them, then it will pay tax in the normal way.
The second category are long-term assets. In other words, things that are likely to be around for more than a year, and it is this category that is liable to capital gains tax.
It is also important to remember that a gain doesn’t have to be made on a physical thing. Capital Gains Tax can also be payable on intangible items like brands, trademarks, patents, and shares in other companies.
We do need to reiterate that capital gains tax is a complex area for businesses. For instance, a business set up to invest in fine art will pay tax differently to a business that just happens to have made a gain on some art it had on their office wall.
Working out your gain for Capital Gains Tax
Capital Gains Tax is worked out based on the profit that you make, rather than on the full amount of the sale. In plain terms, it’s the difference between what the asset was worth when you acquired it, and what you sold it for.
You can deduct eligible costs from the gain, and then pay Capital Gains Tax on the amount left over.
For example, if you paid advertising fees to sell the asset, or you spent money to improve the asset beyond normal repairs, you can deduct these costs from the gain you make.
Is there a tax-free allowance for Capital Gains Tax?
It’s not all doom and gloom, and there is a tax-free allowance available before you start paying Capital Gains Tax. Known as the Annual Exempt Amount, the allowance you’re entitled to depends on whether you’re an individual or a trustee.
So, if you’re an individual and the total of all gains is less than £6,000 in 2023/24, then you won’t pay any Capital Gains Tax at all.
If all your gains for the year total £10,000 you’ll only pay Capital Gains Tax on the portion of the gain which is over the allowance (in this example, £4,000 is taxable). And never forget! We’re looking at the gain here, and not the sale price.
Do I need to report capital gains below the allowance?
No, you only need to report and pay Capital Gains Tax on taxable gains above the allowance.
Capital Gains Tax relief for businesses
There are CGT relief schemes available, such as Business Asset Disposal Relief, if you need to pay Capital Gains Tax on gains that you make through your business. The eligibility criteria and the level of relief available does vary, so it’s always worth getting advice!
How much Capital Gains Tax will I pay?
The rate of Capital Gains Tax that you pay on the gains you make above the allowance depends on what the asset is, and the rate of income tax you pay.
The rate of Capital Gains Tax
The rate of Capital Gains Tax that you’ll need to pay depends on the items that you dispose of, and what type of taxpayer you are. The Capital Gains Tax rate has stayed the same throughout the 2022/23, 2023/24, and 2024/25 tax years.
Basic Rate Taxpayer
Higher Rate Taxpayer
Gains from residential property
Gains from other chargeable assets
Working out Capital Gains Tax
So far this may all seem a little theoretical so we thought it would be helpful to include an example. The starting point is to work out your gain.
This is simply the selling price, minus the cost of acquiring the asset. Remember that you are also allowed to offset any costs of selling, purchase costs, and the value of any improvements you have made in the meantime.
John makes a profit selling a painting he bought a few years ago. It is his only gain in the 2023/24 tax year. He currently earns £22,000 per year from his full-time job.
Proceeds from the disposal
What did John get in return for disposing of the asset? In this example, it’s the price he sold the painting for.
Total costs and expenses
What John spent on the asset.
Auction fees: £3,000
Original purchase cost: £10,000
The proceeds from the disposal, minus the total costs.
Total taxable gain
The total gain, minus the Annual Exempt Amount, which is £6,000
John’s income for the tax year
In this case it’s the taxable gain he made, plus his salary.
Total taxable gain: £11,000
The rate of Capital Gains Tax
To work out which rate of Capital Gains Tax to use, remember:
John’s total income for the year is within the basic rate tax band
The gain is from a chargeable asset, not property
Capital Gains Tax to pay
The total taxable gain multiplied by the rate of Capital Gains Tax