Understanding Capital Gains Tax
Capital Gains Tax, or CGT, is the tax you will pay when you sell or gift an asset specifically for profit. It is a complicated subject, and the rate of tax you could pay depends on your financial situation at the time of the sale.
CGT can impact a wide range of people, from private investors to the self-employed, married couples and more, so it’s beneficial for you to understand how it works in case it ever impacts you.
Read on to find out everything you need to know about Capital Gains Tax!
How does Capital Gains Tax work?
Capital gains is a tax on the sale, gifting, exchange, and disposal of assets for profit. It is important to note that CGT is charged on the whole profit of an asset, however, everyone has an annual exemption. This was £12,300 in 2022/23 and is currently £6,000 in 2023/24.
Some assets and family members face different rules on Capital Gains Tax with some exempt all together, although, it is safe to assume that every asset you own (like artwork or company shares) could be subject to CGT. Even when gifting assets to your children, the rules impose a “market value” on the gift and the tax can still be applied.
What are the CGT rates?
CGT is charged at 10% for basic-rate taxpayers and 20% for higher-rate taxpayers, with these rates rising to 18% and 28% respectively when charged on residential property (that isn’t your primary home). Furthermore, for disposals of business assets you may qualify for Business Asset Disposal Relief (BADR), an effective rate of 10% applies to the first £1million of gain.
Business Asset Disposal Relief
Previously known as Entrepreneurs’ Relief, BADR is a reduction of your capital gains tax that you could be entitled to if you are looking to sell a business.
The relief allows you to qualify for a lower rate of Capital Gains Tax at 10%, if you are either a sole trader or partner selling a business or its assets, or you are selling a business and control a minimum of 5% of the net assets of the company.
Business Asset Disposal Relief can be a tricky area to navigate, which is why it’s vital that you speak to a qualified professional. Learn more on about BADR our website.
When wouldn’t you pay Capital Gains Tax?
As mentioned earlier, every individual in the UK has an ‘annual exempt amount’ of £6,000 for the 2023/24 tax year. This means you will not pay any Capital Gains Tax on the first £6,000 of profit you make when selling assets.
This amount is a large reduction on the 2022/23 tax year, which was £12,300, so it’s important to take this into consideration when managing your assets or you may end up paying more Capital Gains Tax than expected. This amount may also be reduced even further in the coming years.
There are also some items that are CGT-exempt. Some common examples include your main residence, personal vehicle, charitable gifts, cash, and shares stored in an ISA.
Assets can be gifted to your spouse or civil partner free of capital gains, provided you lived together during the tax year in which the gift took place. It is important to remember, however, that if your spouse or civil partner were to sell or dispose of this gift later, Capital Gains Tax would then be charged over the total period of ownership.
This means that the profit you made on the sale will consider the value of the asset when you first came into possession of it, not when you gifted it. This could lead to you paying a higher sum of than you might have expected.
Capital Gains Tax relief for private investors
Understanding CGT is a crucial aspect of managing tax-efficient investments, and Investor’s Relief is a big part of that for individual investors. This type of relief allows higher- and additional-rate taxpayers to reduce their CGT rate to 10%, rather than 20%.
Investors Relief applies to regular shares that were purchased on or after 17 March 2016 and held for at least three years that were initially subscribed for in cash. The company must be unlisted and trading throughout. There is a £10 million lifetime cap on the relief.
Always reach out to a professional for help
Whether investing privately or looking to sell other assets to make a profit, always get in touch with a qualified financial professional to find out how CGT and other taxes may affect you.
Edwards Accountants are proud to have a team of dedicated accountants in Walsall and across the West Midlands. Our specialist tax accountants will help you identify possible tax charges and help minimise their effect on your wealth.