Capital Gains Tax (CGT) is a tax on the profit (the gain) that you make when ‘disposing’ of an asset that 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

It can work in different ways depending upon the type of asset, and why and how you acquired it. Although in its basic form capital gains tax is simply a charge on the increase in value of an asset, the way that it works in the UK can get very complex indeed.

So, in this post, we’ll take you through the basics and give you some simple scenarios to show you how it works.

But please don’t rely on just this post to work out your CGT. As we mentioned, this is a very complex area of taxation! You should always take advice from an expert before making any decisions.

In this post we cover:

Capital Gains Tax for individuals

Capital Gains Tax for businesses

Working out your gain for Capital Gains Tax

Capital Gains Tax allowances, reliefs, and rates

Examples of Capital Gains Tax workings

On a day-to-day basis, most individuals won’t come across Capital Gains Tax because they’re not engaging in activity which makes a significant capital gain.

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 personal possessions which are sold for less than £6,000.

Also exempt 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 CGT 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!

A quick overview on Capital Gains Tax for houses

The time when most people make a significant capital gain is when they come to sell their house. With property prices rising very rapidly for a number of years, this can be a substantial gain indeed.

But even when you come to sell your house you won’t need to pay Capital Gains Tax as long as:

• You only have one home, and you’ve lived in it 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)
• Part of your home hasn’t been used 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

Capital Gains Tax for cars

The second biggest thing that most people buy is a car. If you are in the lucky position of having made money when you come to sell, then you won’t pay CGT on this either 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.

Capital Gains Tax on personal possessions sold for more than £6,000

Sadly, it’s not all plain sailing. In other areas, Capital Gains Tax is payable, especially where you have bought assets as investments.

For example, if you invest in paintings, jewellery, or antiques, and you sell for £6,000 or more, then you may need to pay Capital Gains Tax on the profit you make from the sale.

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.

Different type of assets in a business

When we talk about Capital Gains Tax for businesses, then it’s important to understand what the term asset means within a business context. A business might have two different types of asset that it uses.

Current assets

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.

Fixed assets

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.

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.

Deducting costs from your gain

The good news is that you can deduct some of your costs from the gain, and therefore reduce the amount of Capital Gains Tax payable on the gain. For example, if you paid advertising fees to sell the asset, or you spent money to improve the asset, beyond normal repairs.

Sole traders and partners

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.

It’s not all doom and gloom, and there are tax allowances and reliefs available for Capital Gains Tax.

Tax allowances for Capital Gains Tax

Capital gains are treated differently to personal income, so although you get a personal tax allowance (which is £12,570 in 2022/23), the allowance for Capital Gains Tax is different.

You can deduct the Capital Gains Tax allowance (also known as the Annual Exempt Amount) from your total gains for the year.

 
So, if you’re an individual and the total of all gains is less than £12,300 in this tax year, then you won’t pay any Capital Gains Tax at all.

If all your gains for the year total £12,500, you’ll only pay Capital Gains Tax on the portion of the gain which is over the allowance (in this example, £200 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 whether you’re a basic rate taxpayer or higher rate.

 
If all your taxable income for the year is less than this amount, you’re a basic rate taxpayer. If the net gain takes you over this threshold, then you will pay Capital Gains Tax at the higher rate on the excess amount.

Capital Gains Tax for basic rate taxpayers

Capital Gains Tax for taxpayers on the higher rate of income tax

So far this may all seem a little theoretical so we thought it would be helpful to include some examples.

The starting point is to work out your gain. This is simply the selling price, minus the cost of buying 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.

Example of CGT as a basic rate taxpayer

John is a basic rate taxpayer who has made a profit selling a painting he bought a few years ago. It is his only gain in the year.

He currently earns £22,000 per year from his full-time job.

Sally, the basic rate taxpayer

Sally is a basic rate taxpayer who sold jewellery she bought a few years ago for a profit. It is her only gain in the year.

She currently has taxable income of £32,000 per year from her full-time job and as such is a basic rate taxpayer. The gain that she makes takes her over the basic rate threshold.

This means she’ll pay Capital Gains Tax as a basic rate taxpayer (10%) on the part of the gain that’s below the threshold, and as a higher rate taxpayer (20%) on the part above the threshold.

Simon, the higher rate taxpayer

Simon is a basic rate taxpayer who sold a holiday home he bought a few years ago for a profit. It is his only gain in the year.

He currently has taxable income of £92,000 per year from his full-time job and as such is a higher rate taxpayer.

In this example we can see that Simon’s gain is all in excess of the basic rate threshold due to his taxable income from his job.

This means that everything over the basic threshold is charged at the higher rate. In this case, it is 28% because he has sold residential property that he has never lived in.

Tax is a complicated area, which is why it’s useful to chat with someone who knows their way around the subject. Learn more about our online accounting services for businesses, and make the most of any tax allowances and reliefs available. Call 020 3355 4047 or get an instant online quote.

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About The Author

Elizabeth Hughes

A content writer specialising in business, finance, software, and beyond. I'm a wordsmith with a penchant for puns and making complex subjects accessible. Learn more about Elizabeth.

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