When you buy an investment and then sell it you may have (hopefully!) made a profit. That’s known as a capital gain, and you may have to pay Capital Gains Tax (CGT) on it – but only if the investment is held outside a tax-efficient account such as an ISA or Self-Invested Personal Pension (SIPP).
When do you pay Capital Gains Tax?
You’ll have to consider CGT when selling, gifting or otherwise disposing of any investment that isn’t held in a pension or ISA. CGT is chargeable for investments such as:
- Equity shares
- Funds and investment trusts
- Cryptocurrencies such as Bitcoin
- Secondary residential property e.g. a buy-to-let or holiday property
Some assets are exempt such as motor cars, UK government bonds (gilts) and foreign currency for your own use. Your own home is also usually exempt, though if you have rented it out at any point it might only partly qualify for relief.
An exception applies if you transfer any asset to your husband, wife or civil partner. This is CGT free but the new owner ‘inherits’ any gain on the asset and may have to pay tax when they come to sell.
What is the Capital Gains Tax rate?
The amount of tax you're charged depends on which income tax band you fall into. Basic-rate taxpayers are charged 10% on their realised profits, while higher-rate (and additional rate) taxpayers must pay 20%.
Not widely understood is the interaction of CGT with income tax bands. If you're a basic-rate taxpayer, any gain over the allowance you make, when added to your income, could push you into the higher-rate bracket. If so, you'd pay 20% on however much of the gain falls into the higher income tax band and 10% on the portion below it. If you are a Scottish taxpayer your CGT rate depends on the rest of UK income tax bands and not the Scottish tax bands.
There is an additional 8% to pay on gains on secondary residential property such as a buy-to-let or holiday property, making the CGT rates here 18% and 28% respectively. Meanwhile ‘business assets’, generally a share or interest in the company or firm you work for attract a flat rate of 10%, subject to meeting certain criteria – see more on the HMRC website here.
Tax on realised profits
You'll only need to pay tax if your realised profits exceed the annual capital gains tax allowance. In the 2023/24 tax year, this is £6,000 – and this is set to fall to just £3,000 from April 2024. For example:
- If you bought shares outside an ISA or pension for £10,000 and sell them this 2023/24 tax year for £30,000, then you’ve made a capital gain of £20,000
- If you have no other gains, this is reduced to £14,000 as the first £6,000 falls into the CGT annual exemption
- For a basic rate tax-payer (with income and gains falling below the higher rate tax band) the calculation is therefore £14,000 x 0.1 = £1,400
If you make losses on your investments these can be set against your gains, but they must be reported to HMRC. When you report a loss, the amount is first deducted from the gains you made in the same tax year. If your total taxable gain is still above the tax-free threshold, you can deduct unused losses from previous tax years – so long as they have been reported to HMRC within four years of the end of the tax year that the disposal took place.
How do you work out Capital Gains Tax?
In general, you deduct the cost of acquiring the asset (including any expenses such as commission) from the proceeds after costs. Complications can arise if an investment has been purchased or sold in stages, so you will need to keep good records or, if you have bought shares or funds in your Charles Stanley Investment Account, refer to the ‘tax cost’ figure in your online valuation. Please note if you transfer investments into the service, your previous provider may not inform us of the cost.
Broadly speaking, the cost of any share or fund is the total amount paid for the overall holding divided by the number of shares held. This means that, when calculating the capital gain on a sale of shares at the end of the tax year, you just need to know the total number of shares and total amount paid for them. There are examples and help sheets on the HMRC website that can help, but as with any tax issue if you are in any doubt you should consult a qualified tax specialist.
Although you usually acquire an asset through buying it, you might also have inherited it or received it as a gift. In these circumstances, you need to keep records of the value of the asset on the date you acquired it. If you inherited the asset, the executors of the deceased should have provided you with this.
For investors holding shares and other investments, either in single in joint names, in a Charles Stanley Investment Account, we can provide CGT reports for the current and previous tax years to help with your record keeping and tax returns.
How to pay less tax on investment gains
1. Use tax efficient wrappers as far as possible
The reduction in the capital gains allowance, from £6,000 to £3,000 from April 2024 onwards, emphasises the need to use tax-efficient ISA accounts, or pensions, to house investments as far as possible. Any income is tax free, as are any profits, in an ISA account.
A potential consequence of the reduced allowance is more people will have to report gains to HMRC either via a self-assessment tax return or through the ‘real time’ service, so using an ISA can make life a lot easier.
If you’re over 18 and UK resident, you can pay up to £20,000 into a Stocks and Shares ISA each tax year to invest in shares, funds, investment trusts and more.
2. Harvest some gains
Those with significant capital gains, and therefore potential tax liabilities, could consider taking advantage of this tax year’s higher CGT allowance by selling down investments. You’ll need to do so before the end of the tax year on 5 April, as you can’t carry it forward to next year when the allowance drops to £3,000.
One option for existing shareholdings is a ‘Bed & ISA’ which can help use your CGT and ISA allowances simultaneously. It involves selling holdings and then buying them back in an ISA account. The sale crystallises any capital gain, so selling or partially selling an existing investment could help with tax planning by using some of your capital gains allowance while keeping your holding. Outside of an ISA or pension you are prevented from generating gains in this way owing to the 30 day or ‘bed and breakfasting’ rule explained here on the HMRC website.
3. Divide assets
If you are married or in a civil partnership, it may be worthwhile transferring assets to or from your partner. You usually don’t pay capital gains tax on an asset you give or sell to your husband, wife or civil partner, though they may have to pay tax on any gain if they later dispose of it.
This could give you the option of taking full advantage of two CGT allowances before they’re reduced in the new tax year. A couple, for instance, could realise gains of up to £12,00 this tax year (2023/24) without paying tax.
You could also divide assets to take advantage of lower income tax bands where one partner’s income is lower. This way there may be less tax to pay on a gain received outside of a tax wrapper.
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Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.
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