Until they start taxing sex, in the UK capital gains tax (CGT) is the most annoying tax to find yourself paying.
CGT is a tax on any profits you make when you sell or transfer assets like shares in your portfolio, rental properties, or even your own company.
In the UK capital gains tax is much simpler than it used to be. UK capital gains tax is now a flat 18% tax rate, and fiddly nonsense like taper relief has been abolished. It no longer matters whether you’ve owned your shares for a day or a decade when calculating your taxable gains.
Even with the new flat rate, like a fly in your soup CGT can really spoil the fun of making money.
Unlike inheritance tax, which is a tax on your good fortune, or income tax, which is a cost of having a job, UK capital gains tax is a tax on success!
Of course, sometimes you won’t make a profit when you sell. That’s called a capital gains loss, and unfortunately you don’t get money back from the government for losing money (not unless you make cars or you’re a bank…)
However, you can offset capital gains with capital losses to reduce the total gain you will pay tax on.
The good news is in the UK capital gains tax is a fairly avoidable tax for most investors. (Remember, you’re allowed to avoid paying taxes where possible, but tax evasion is illegal.)
UK capital gains tax: What’s charged and when?
When: You are charged CGT on asset sales generated in a particular tax year (which runs for 12 months starting every April 6th).
What: Most capital gains are taxable, but in the UK capital gains tax is NOT charged on these assets:
- Your main home (in 99% of cases)
- UK Government bonds (gilts)
- ISA holdings
- Personal belongings worth £6,000 or less when you sell them
- Betting, lottery or pools winnings (including spreadbets)
- Money which forms part of your income for Income Tax purposes
- Venture Capital Trusts
That still leaves many key assets liable for UK capital gains tax when held outside of an ISA, including:
- Shares
- Corporate bonds
- Funds
- Antiques
- Buy-to-let property
- Land
Finally, you have an annual allowance of taxable gains that you can make in a year before you have to pay CGT. This is currently £10,100.
Capital gains are pooled together
Note that all capital gains and losses go into the same ‘pot’ from the Inland Revenue’s point of view.
For example, if you made a gain of £15,000 selling shares and £8,000 selling an antique wardrobe, your total capital gain would be £23,000.
Here losses can help you out – for example, if you make a taxable gain on your shares but a loss on selling your buy-to-let property, you can use the loss to offset or even wipe out the tax due on the gain.
See my article on avoiding capital gains tax for ten ways to reduce your UK capital gains tax bill.
