No one likes to paying capital gains tax, but it’s part of life. The UK requires you to pay capital gains tax (CGT) on sale transactions.
This article will cover capital gains tax and what it involves. We cover how you can reduce CGT and how to pay it. The excellent news is CGT is at a low rate compared to previous years. From 1965 to 1988, the tax rate for capital Gains was set at 30%, and the rate was reduced to encourage investors to declare the tax rather than evade it.
What is Capital Gains Tax?
Capital Gains Tax (CGT) is a tax if you sell or dispose of an asset.
CGT applies to shares, property and personal possessions worth over £6,000. Business assets will be treated differently.
You should take into account the exemptions and reliefs you have.
Each person has an annual exempt amount. The amount is £6000 per person in the 2023-24 tax year. From April 2024, the annual allowance will reduce to £3000 per tax year.
CGT annual allowances should be used every tax year. It is not possible to carry unused years forward. However, if you have made losses in the past, these can be carried forward.
You should deduct the original cost from the sale proceeds to work out the gain. You can deduct expenses and tax reliefs incurred during ownership. The profit after any deductions is the taxable gain.
Most gains will be subject to income tax rates of 10% or 20%. It depends on your income and if you pay basic or higher-rate tax.
Different tax rates apply to residential property. If you are unsure how much tax you must pay, seek professional advice. This could be from a qualified accountant or financial adviser. You could also consider using a tax calculator to get a basic idea of how much you might incur.
Who has to pay Capital Gains Tax in the UK?
Whether you pay CGT depends on your situation. It depends on various factors. Some key variables that may affect you include.
- the type of asset sold
- how long you held the asset before selling it
- Any applicable exemptions or exclusions are available.
- The level of income tax you pay
How to Calculate Your Capital Gains Tax?
Calculating the amount of capital gains tax in the UK is crucial.
Let us consider an example scenario. A person has sold their shares for £50,000, and the original cost was £30,000.
The gain is £20,000. They have an annual exemption of £6000. CGT is payable on the excess gain.
The rate that applies depends on which income band you fall into. Basic-rate taxpayers pay 10% CGT. While higher and additional rates, taxpayers pay 20%.
In our example, someone on basic-rate tax will pay £1400 in capital gains tax. The calculations are:(14000 x 0.1) = £1400. Overall correct calculation of your CGT helps you comply with HMRC rules.
How to pay less CGT
Avoiding Capital Gains tax is vital when the gain is significant. It is an important part of financial planning and should be addressed each year, and it is one of the most important aspects of tax planning. The reduction of tax when your financial planner provides investment advice is one way your advisor adds value.
Several strategies can be implemented to avoid paying capital gains tax. I have listed below just a few ways to reduce the amount of capital gains tax you might pay.
- One such strategy is offsetting capital losses from previous years. By doing this, you can reduce the gain and the amount of tax payable.
- Another approach is utilising your annual exemption each year. Married couples and civil partnerships have two sets of allowances.
- Postponing asset sales. This could be more beneficial from a taxation perspective. It could also prove advantageous.
- It is also possible to roll over the Capital Gains tax. This is possible with certain types of assets.
An accountant or financial advisor can help you make the right decisions. You can then minimize your exposure to capital gains tax.
How to Pay the Tax on Gains
There are several options available to pay Capital Gains tax. Firstly, you must work out if you have an annual exemption. This stands at £6000 (as of 2023/24). The government has confirmed the CGT allowance for the 2024/2025 tax year will reduce to £3000.
Therefore using investments where CGT is not applicable, such as individual savings Accounts(ISA), must be considered. If you exceed the threshold, you may be liable to CGT. Homeowners can qualify for Principle Private Residence Relief.
Different rates apply depending on your taxable income and the assets sold. For instance, if you’re selling and you make total gains on a second property. If your income exceeds £50k, you will likely be a higher-rate taxpayer.
When CGT applies, you must report these via your self-assessment tax return. The return is due by Jan 31st of the following the end of the tax year.
Some transactions are reported using the real-time capital gains tax service.
You still need to report the gain on your annual tax return. Gains are paid within 60 days if you use the real-time service.
Paying any CGT is simple. You can pay the tax using most banking methods, including direct debit, online or telephone banking and bank transfer.
Payment from another account is also possible.
Common Questions and Answers about paying Capital Gains Tax
How can I legally pay less capital gains tax?
You can reduce capital gains tax by gifting an asset to your partner. This tax-free transfer allows you to use both CGT allowances. This doubles the amount you’re allowed to keep.
What is the capital gains tax in the UK for 2023?
For the 2023 to 2024 tax year, £6,000 is exempt from taxation. Gains above the level will be subject to CGT
What costs can I put against capital gains?
- Certain expenses when you purchase the asset.
- Costs to improve the asset, secure its title, or protect its rights.
- Expenses connected with the asset sale.
- Legal Fees
- Estate Agent Fees
Capital Gains tax is complicated. We advise you to seek professional advice. With the advice, it could be possible to reduce or eliminate CGT.
If you would like to discuss your situation, please contact us.