What is capital gains tax and how much will I pay?

Capital gains tax applies to gains on assets ranging from shares to second homes, buy-to-let properties and personal possessions.

It is traditionally applied at lower rates than income tax because the assets in question tend to be those on which people take risk, whether business or through investments held outside of Isas and pensions.

Earned income and interest on savings are more guaranteed and are therefore taxed differently and more heavily.

Your main home where you live, known as your Principal Private Residence, is exempt from CGT. That, plus an annual tax-free allowance which until April 2023 was £12,300, has meant that CGT typically applies to the wealthiest taxpayers.

However, radical cuts to the CGT subsidy (to £6,000 in spring 2023 and £3000 from April 2024 – make it inevitable that many more people will have to pay it in the future.

Capital gains tax applies to your profits.

Capital gains tax is paid on the Profits when you sell a asset – the price it sells for, less what you paid for it or what it was worth when you bought it.

Depending on the asset there are reliefs available and each person has a capital gains tax reliefwhich is currently £3,000, to offset your earnings.

“If an asset has been transferred to you as a gift, the value of the transfer will be the valuation for the acquisition,” says Heather Rogers, tax expert at This is Money.

“Where the property is left to you by will, the testamentary value will be the value at which you will be deemed to have acquired it.”

Rogers adds: ‘Acquisition and disposal costs can be deducted, if applicable: the estate agent’s and solicitor’s fees on the sale, for example. You can also deduct costs where you have spent money and added value to the asset.’

Regarding CGT rates, if you are a higher or additional rate taxpayer (40 per cent or 45 per cent respectively), the CGT rate is 24 per cent on residential property gains and 20 per cent on gains from other taxable assets.

For basic rate taxpayers (20 per cent), if your taxable profit plus your total taxable income falls within the basic income tax band of £12,571 to £50,270, the CGT rate is 18 per cent. on residential properties and 10 percent on other earnings. .

If the amount is higher, the CGT rate is 24 per cent on residential properties and 20 per cent on other gains.

The Government has More information about CGT rates here.

Rogers explains here how to carry forward capital losses to offset capital gains.

And it looks at which types of personal property, referred to in this context as “movable property”, are subject to CGT and which are exempt.

What do buy-to-let landlords need to know about CGT?

When you come to sell your buy-to-let property, you will need to pay capital gains tax on any gains.

It applies to any property that is not your main home (your main private residence), including also private second homes.

CGT applies at the rates explained above, but as profits are added to income to get a total amount, this means that in practice most homeowners who make decent profits should pay the 24 per cent rate.

There are two reliefs you can get on your CGT bill, but both are less generous than before.

Firstly, there is a capital gains tax regime specifically for “accidental” owners, who once lived in a property before renting it out.

If a homeowner rents out a property that was once their main home, capital gains tax only applies on the amount the home increased in value while they were not living there.

Homeowners can also add an additional nine months to the amount of time they lived in the property; This is known as a “final period exemption.”

As an example of how this works, a homeowner who has owned his property for 10 years and has lived in it for two pay tax on seven years and three months of capital gains: the 10 years, less the two years of residence plus the reduced tax relief of nine months.

another key The CGT subsidy to consider is “rent relief”.

When a homeowner sells their old home after renting it out, up to £40,000 of their profit can be exempt from capital gains tax, but this now applies only if they lived in the property with their tenants.

In the meantime, you can reduce your CGT bill by deducting some of the expenses associated with buying and managing a property.

You may also be able to offset losses from other properties against your capital gains tax bill.