In this factsheet we set out how Capital Gains Tax (CGT) works and when it may apply.
We deal with many calls about CGT. Callers are naturally concerned that it may apply when selling an asset, particularly shares and property. A common misconception is that if you dispose of an asset but do not receive any cash it will not apply. In the majority of situations this will not be the case, so here are some key facts you need to know.
What is CGT?
CGT is a tax on any increase in the value of an asset when it is transferred by sale or gift to a third party. It also applies to a sale or transfer at an undervalue i.e. at less than the true value of the asset.
How is CGT calculated?
In its simplest form, the gain will represent the difference between the amount received and the amount paid for the asset. In addition, incidental costs of acquisition and disposal may be deducted. Examples include a broker’s fee in relation to a disposal of shares or solicitor’s fees in connection with a property sale.
In relation to property, a deduction will be permitted for enhancement expenditure which is reflected in the selling price of the asset, such as the addition of a conservatory or extension, but not the odd lick of paint that might be applied prior to any sale.
Any resultant profit is a chargeable gain. If a loss arises it may be carried forward and offset against chargeable gains in future tax years. If, however, there has been more than one disposal in a given tax year – some of which have generated gains and others losses – then these will be offset against one another to arrive at a net figure.
It should be noted that special provisions apply where losses arise upon disposals to connected persons (typically a family member) which restrict the way losses may be utilised. Each individual is entitled to a tax-free allowance which serves to reduce the level of taxable gains. For the tax year 2023/24 this allowance is £6,000 and for 2024/25 will be reduced further to £3,000. For disposals made by trustees, other than trustees for the disabled and personal representatives, the corresponding allowance is £3,000 for 2023/24 and £1,500 thereafter.
What about gifts and assets that are inherited?
Where gifts are involved, it is assumed for CGT purposes that the value of the asset is as if it had it been sold on the open market at the time of transfer. Similarly, beneficiaries are deemed to acquire assets at their market value as at the date of death, often referred to as probate value.
When gifts or inherited items are disposed of, the market value/probate value is used as the relevant cost figure in any calculations. If the asset is sold for more than this value, CGT will be applied to that gain (subject to the tax-free allowance above).
Are there any assets which are exempt from a tax charge?
The major exempt asset will be an individual’s main residence, provided it has been owned and occupied throughout as a main residence. This is known as Principal Private Residence (PPR) relief. In assessing whether full PPR relief is due, certain periods of absence are permitted but these often come with conditions attached. This can be a complex area and further guidance can be found in the HMRC helpsheet here .
Advice in this area is more popular with the increase in buy-to-let properties and may need careful consideration if this applies.
Other items which are exempt include, but are not restricted to, the following:
- your car
- Stocks and Shares ISA
- UK Government Gilts and Premium Bonds
- personal belongings worth £6,000 or less per item or per set
- betting, lottery or pools winnings
Transfers of assets between spouses/civil partners
Special rules apply in relation to transfers between spouses and civil partners who are living together. In these cases, there is no immediate charge to CGT and the recipient spouse is deemed to have acquired the asset at the same value/cost as that paid/deemed to have been paid by the transferor. This is referred to as a no gain/no loss transfer.
The rules change for any transfers made after separation. Up until 5 April 2023, if you were married or in a civil partnership and then separated, any transfers made in the tax year after separation, but before divorce, will be deemed to have been made at a consideration equivalent to market value.
For transfers on or after 6 April 2023, new provisions apply that extend the period for which the no gain/no loss provisions apply. Special rules will also apply where transfers take place in accordance with a formal divorce agreement. Further details may be found here.
At what rate will I pay CGT?
The rate of CGT payable will depend how much taxable income you have in the tax year of disposal(s). The gain is treated as the top slice/part of income and is added to all other taxable income. Depending on the level of gain and the nature of the asset disposed of, the relevant tax rates applicable to the gain(s) may be found here:
Capital Gains Tax: what you pay it on, rates and allowances: Capital Gains Tax rates – GOV.UK
Business Asset disposal relief applies, for example, on disposal of a business. Further information about this relief can be found here.
When is CGT payable?
As a general rule, CGT is payable on or before 31 January following the end of the tax year in which the relevant disposal(s) take place and forms part of the standard self-assessment tax return process. Special payment rules apply to certain disposals of UK residential property resulting in tax being payable within 60 days of completion – further information can be found here.
In limited circumstances it is possible to defer the payment. It is advisable to seek professional advice in this instance. Further guidance on this may be found in the HMRC site.
HS295 Relief for gifts and similar transactions (2024) – GOV.UK
HS297 Capital Gains Tax and Enterprise Investment Scheme (2024) – GOV.UK
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