Capital gains tax (often referred to as ‘CGT’) is a tax payable by UK individuals who sell or dispose of an asset at a profit. Capital gains tax is applicable to the taxable gain (i.e. the difference between the sale price/disposal value and the purchase price) rather than the full sale price.
Disposal value applies in the scenario where an asset is not sold, but rather it is gifted, swapped or transferred. For example, if you gave an asset to a friend for free, a capital gains liability would arise on the deemed value of the asset on transfer.
- Capital Gains Tax rates
- Capital Gains Tax individual allowance
- How to calculate Capital Gains Tax
- Example CGT calculations
- Do companies pay Capital Gains Tax?
- Tactics to avoid Capital Gains Tax
Capital gains tax rates
The Capital Gains Tax rates applicable to the 2020/21 tax year differ depending on whether you are disposing of residential property (not including your main residence which is exempt from Capital Gains Tax) or other investment assets.
|Income tax rate||CGT % on property||CGT % on other investments|
|20% (basic rate)||18.0% (up to basic tax rate, and then 28.0% thereafter)||10.0% (up to basic tax rate, and then 20.0% thereafter)|
|40% (higher rate)||28.0%||20.0%|
|45% (additional rate)||28.0%||20.0%|
Higher or additional rate taxpayers will always pay:
- 28% on gains from residential property
- 20% on gains from other chargeable assets
However, basic rate tax payers may benefit from lower Capital Gains Tax rates of 18.0%/10.0% on all or part of the capital gain. See the how to calculate Capital Gains Tax section later in this article for further detail.
Capital gains tax individual allowance
UK individuals each have a capital gains tax allowance of £12,300 in the 2020/21 tax year (6 April 2020 to 5 April 2021). This allowance is known as the annual exempt amount. This represents an increase of £300 vs the 2019/20 tax year allowance of £12,000.
Capital gains tax exemptions
Certain assets are exempt from capital gains. These include:
- your personal car
- your main residence (unless its been let out or used for business purposes)
- shares held in a tax-free wrapper (ISA or SIPP)
- personal possessions worth less than £6,000
Gifts to your spouse or a charity are exempt from capital gains tax, though if your spouse later sold the asset they would pay capital gains on the difference between the sale price and your initial purchase price.
How to calculate Capital Gains Tax
If your total taxable gain exceeds the Capital Gains Tax allowance, then follow the following steps to calculate your Capital Gains Tax liability:
- Calculate your total taxable income – This means your total income (e.g. salary plus any other taxable income) before tax, minus your annual personal allowance (standard allowance is £12,500 in the 2020/21 tax year, unless you earn in excess of £100,000 in which case it reduces by £1 for every £2 over £100,000 earn) and any other income tax reliefs you are entitled to.
- Calculate your total taxable gains – You can calculate this by adding up the profit / loss you made on every disposal in the tax year and then deducting the annual CGT allowance (£12,300 in the 2020/21 tax year). Remember that you can include the costs of improving assets and the costs of buying/selling assets in each individual gain calculation.
- Add your total taxable gain to your total taxable income – If the total of these two figures comes to a total higher than the higher rate tax threshold (£50,000 in 2020/21), then you will pay the basic rate (10%/18%) of CGT up to the threshold and the higher rate (20%/28%) on the remaining balance.
Example CGT calculations
Example 1 – CGT for Basic Rate Taxpayer Remaining Below Threshold
Ten years ago, Ben bought 1,000 shares in ABC PLC for £13.10 per share, which cost him £13,100. Fast forward to the 2020/21 tax year and the share price has rocketed to £30.00 meaning his shares are now worth £30,000.
Ben earns £40,000 a year and benefits from the personal allowance of £12,500. His taxable income is therefore £27,500.
Ben decides to sell his shares at this price, generating a gain of £16,900. After deducting the Capital Gains Tax allowance of £12,500, Ben has a taxable gain of £4,400.
As Ben’s taxable income (£27,500) plus taxable gain (£4,400) does not exceed the higher rate tax threshold of £50,000, the gain will be taxed at the lower rate of 10.0%.
The Capital Gains Tax bill would be £4,400 * 10.0% = £440.
Example 2 – CGT for Basic Rate Taxpayer Exceeding Higher Rate Threshold
Lets imagine the same scenario, but with Ben originally acquiring and ultimately disposing of 3,000 shares. The 3,000 shares in ABC PLC would have cost £39,300 and the sale would generate proceeds of £90,000.
Taxable income remains unchanged at £27,500, but the taxable gain increases to £38,400 (£90,000 – £39,300 – £12,300) which brings the total of the two to £65,900.
As this exceeds the higher rate threshold of £50,000, Ben would pay:
- The lower rate of CGT on the value of the gain up to the threshold. This would be £22,500 (£50,000 higher rate threshold – taxable income of £27,500).
- The higher rate of CGT on the value of the gain over the threshold. This would be £15,900 (£65,700 minus the £50,000 higher rate threshold).
The total Capital Gains Tax liability would therefore be:
- 10.0% * £22,500 = £2,250
- 20.0% * £15,900 = £3,180
- Total = £5,430, a blended rate of 14.2% (£5,430 divided by the £38,200 gain)
Example 3 – CGT for Higher Rate Taxpayer
If Ben were a higher rate taxpayer irrespective of any capital gain, the full gain on disposal of the shares would be taxable at 20.0%.
Using the taxable gain of £38,400 outlined in the example above, the CGT liability would be £7,680 (£38,400 * 20.0%).
Do companies pay capital gains tax?
No, capital gains tax is a tax on UK individuals. If a limited company makes a gain on an investment, it would pay corporation tax on any profit made.
Tactics to avoid Capital Gains Tax
- Avoid the Capital Gains Tax 30 day rule – Also known as the ‘bed and breakfast’ rule. The 30 day rule prevents you from selling shares at the end of one tax year and then re-buying them immediately / within 30 days of the start of the next tax year to re-base your acquisition cost of those shares. Read the linked article for further information on how to avoid falling foul of this rule.
- Use it or lose it – Unfortunately, the Capital Gains Tax allowance cannot be carried forward to future tax years. This means that it makes sense to carefully consider the right time to dispose assets. Remember, transfers to your spouse are free of Capital Gains Tax. This means that you can take advantage of both of your individual Capital Gains Tax Allowances irrespective of whose name the asset was purchased in.
- Offset Capital Losses – If you have recorded any capital losses in the current tax year, these can be offset against any capital gains in the current tax year. If the value of your capital losses exceeds the value of your gains, then you can carry the losses forward to utilise against future gains provided you have registered those losses with HMRC.
- Capital Gains Tax is wiped out in the event of your death – If you are starting to make plans for passing on your estate, remember that Capital Gains Tax is not payable in the event of your death. If you sell assets and incur a Capital Gains Tax liability prior to passing away, Inheritance Tax will remain payable on the cash passed onto your beneficiaries. This will mean that you will incur both a Capital Gains Tax bill and an Inheritance Tax bill, whereas if you retain the assets, only Inheritance Tax would become payable on the value of the assets.
- Invest via tax-free wrappers – You will pay no Capital Gains Tax on investments disposed of within a tax-free wrapper such as a SIPP or Stocks and Shares ISA. When buying shares, you should typically aim to maximise your annual ISA allowance before starting to acquire shares in a General Investment Account which does not share the same tax-free benefits.
- Reduce your taxable income – As the Capital Gains Liability calculation considers the level of your taxable income (illustrated in example 2, shown above), reducing your taxable income can have a knock-on benefit on your Capital Gains Tax liability. The most common method of reducing taxable income is by increasing your pension contributions as you receive tax relief on any contributions made up to an annual allowance (£40,000 in 2020/21).
Official guidance / disclaimer
For definitive Capital Gains Tax information, consult the official government guidance here or speak with a qualified tax adviser. This article does not constitute tax advice and is intended only to provide an easily digestible overview of Capital Gains Tax rules as we understand them.