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UK capital gains tax

UK capital gains tax explained

Until they start taxing sex, capital gains tax (CGT) is probably the most annoying tax to find yourself paying.1

Capital gains tax is a tax levied on the profits you make when you sell or transfer assets like shares, rental properties, or even a stake in your own company.

Like a fly in your soup on your birthday, paying capital gains tax 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, capital gains tax is a tax on investing success.

Take shelter from CGT! Always try to use tax shelters like ISAs and pensions to shield your investments from capital gains tax where possible. No CGT is payable on gains realised within these wrappers.

Of course, you won’t always make a profit when you sell an investment.

Sometimes you will lose money – that’s called a capital gains loss, and unfortunately you don’t get money back from the government for losing money.

However, you can offset capital losses against your capital gains to reduce the total gain you will pay tax on.

How UK capital gains tax works

Like income tax, capital gains tax is calculated on the basis of the tax year, which runs from 6 April to 5 April the following year.

CGT is paid on the total taxable gains you make selling assets in that tax year, after taking into account:

  • Your annual capital gains tax allowance. (See below).
  • Other reliefs or costs that can reduce or defer the gains.
  • Allowable losses you made by selling assets that would normally be liable for CGT. (The opposite of a capital gain, in other words).

Everyone has an annual capital gains tax allowance, or ‘annual exempt amount’ in HMRC-speak. This allowance is £11,300 as of 6 April 2017.

If your total taxable gains, minus any deductions, comes to more than your annual allowance, then you pay capital gains tax on everything over that tax-free allowance.

Capital gains tax rates

There are several different rates for capital gains tax. The rate you’ll pay normally depends on your total taxable income, and what sort of assets you’ve made a profit on. Second homes and buy-to-let properties are taxed at different rates from other assets.

For most taxable assets:

  • Basic rate taxpayers pay 10% on their capital gains.
  • Higher rate taxpayers pay 20%.

For second homes and buy-to-let properties2:

  • You’re charged 18% at the basic rate on your property gains.
  • Higher rate taxpayers will pay 28%.

Your main home is nearly always exempt from capital gains tax under what’s called Private Residence Relief. This is automatically applied unless you’ve let your home out to more than a single lodger, used it for business, or if you’ve substantial acreage. In those cases, CGT might be payable.

Note that you might normally be a basic rate taxpayer, but have to pay a higher rate on your capital gains if the money you’ve made is enough to move you into the higher rate bracket.

To work out what rate you’ll pay, your capital gain is added to your taxable income from other sources (salary, dividends, savings interest, and so on).

This can all get a bit complicated – see HMRC’s notes on working out your capital gains tax rate band.

What is CGT charged 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.)

Most capital gains on asset sales 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 and SIPP holdings
  • Personal belongings worth less than £6,000 when you sell them
  • Your car, unless used for business
  • Other possessions with a limited lifespan
  • Betting, lottery or pools winnings (including spreadbets)
  • Money which forms part of your income for Income Tax purposes
  • Venture Capital Trusts
  • Certain business holdings that qualify for entrepreneur’s relief.

That still leaves many key assets liable for UK capital gains tax when held outside of an tax shelters, including:

Don’t forget, as I’ve already mentioned you also have that annual capital gains tax allowance.

So you won’t necessarily be liable for CGT just because you’ve sold some taxable assets and made a profit. It all depends on your total capital gains for the year.

When to report CGT: You need to report your taxable gains via your self-assessment tax return if your total taxable gain in the tax year exceeds your CGT allowance OR if your sales of taxable assets are in excess of four times the allowance. So if you sold £20,000 worth of shares in the year3 for a total gain of £5,000, there’s no need to report any of it. (Your total sales were less than four times the annual allowance, and £5,000 in gains is below the annual allowance). If you’d sold say £50,000 of shares, you would have to report the details, regardless of the total gain.

Capital gains are pooled together

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, then that loss can be offset against the capital gains to reduce or even wipe out the CGT that might otherwise be due.

See my article on avoiding capital gains tax for eight other ways to reduce or avoid a capital gains tax bill.

  1. Update: Stamp Duty Land Tax at 5% turns out to be almost as annoying. []
  2. Held personally. Properties held via a limited company are on an entirely different regime. []
  3. Remember, these are sales outside of an ISA or SIPP. Sales inside those shelters are not liable for CGT. []

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{ 20 comments… add one }
  • 1 Minikins December 5, 2015, 12:15 pm

    Thanks for this no-frills guide, this has cleared up a discussion I had in the pub last weekend about what is actually subject to CGT. (Should have checked monevator there and then!) It would be good to have a couple of examples or case studies of taxable gains on sold assets taking into account allowable losses etc. It would help bring it to life.
    How about a portfolio of illustrative guides/tables from Monevator -a sort of ‘Dummyvator’ guide to….. and you could flog’em too 🙂

  • 2 The Investor December 5, 2015, 12:55 pm

    Hah! The irony is I think we have about the smartest readers in the UK personal finance blogosphere… 🙂

    I think it’s all the waffle, sub clauses and syllables that keep the riff raff away… 😉

  • 3 Haphazard January 11, 2017, 10:49 pm

    Thanks so much for this website, so clear and helpful for a beginner!

    Having never invested anything before, I’ve now acquired a lump sum to invest – it will take me over my ISA allowance – and can’t really use my annual pension allowance for the next year either as I’m at risk of redundancy so it’s a bit hard to predict what it will be.

    So – a taxable investment. As I’ve never really used fund platforms before, I wondered how helpful they are in providing information for the tax return (esp. on dividends that need to be declared in accumulation units, and on capital gains tax if you drip-feed or buy funds over time). Capital gains tax calculations look like they could turn out to be a nightmare if you feed money into funds more than once… I used to think I was too stingy to pay for an accountant but perhaps I should think again! And in any case, if I’m to make use of my annual capital gains allowance, I’ll need to have some idea what that is as I go. Is there a simple way to do this?

  • 4 The Investor January 12, 2017, 9:48 am

    @Haphazard — Capital gains tax is a pain. The platforms can’t really help you because they don’t know what assets you have elsewhere, so they can’t calculate the gains for you. You really have to keep records for yourself, via a spreadsheet or similar, of what you bought, when, and for how much.

    Beware too that if you buy a reinvesting income fund, that may make things even more confusing outside of tax shelters:

    http://monevator.com/income-tax-on-accumulation-unit/

    Tax shelters are the business for saving you hassle. Don’t forget you get a new ISA allowance in April (and it will rise to £20,000), which may give you the opportunity to spread your money over two tranches of ISAs.

    Finally, please note the article above is out of date, and needs updating, with respect to the rates payable!

  • 5 Haphazard January 12, 2017, 10:25 am

    Thanks for the answer! That does look messy…and I’d thought accumulation units were the thing to buy if you were saving for retirement. If only we were allowed to carry forward unused ISA allowances from the years of famine. Never mind, I think I’ll end up having to bite the bullet and pay for an accountant for a few years until I manage to convert the whole lot into ISAs.

  • 6 The Investor January 12, 2017, 11:24 am

    @Haphazard — You can use income units for ease of accounting, and remember there’s a new dividend tax allowance which means the first £5,000K of dividends (from all sources you have) are tax-free. So if your equity fund yielded say 5%, it could be over £100K before you start paying tax on the dividends.

    But please note as I say this isn’t specific advice to you, I’m not a qualified tax advisor and anyway don’t know your circumstances.

    An accountant sounds like a good idea, in your situation, but make sure you find one that is clued up about investing. Not all of them are.

  • 7 Haphazard January 12, 2017, 11:58 am

    Yes – I’ve started looking and that’s exactly what I found! When I look at the websites of local accountants, there is just no mention of dealing with tax on investments, and most of them seem to focus on other areas. I’ll keep looking. I just want the peace of mind, really – I’m absolutely happy to do my own financial planning (thanks to excellent websites like this one!) but I’d be far less confident with tax from what I’ve seen.

  • 8 splidge March 28, 2017, 11:37 am

    I’m not sure where the £11,500 figure for the CGT “allowance” (AEA) came from.

    It’s £11,100 for 2016-7 and £11,300 for 2017-8.

  • 9 The Investor March 28, 2017, 12:58 pm

    @Splidge — Ah, rats! Thank you. Seven years to update the numbers and I’m foiled by a typo. I’ve also clarified the two different annual exempt amounts from this year and next, which I should have done in the first place really. No fun updating this old stuff.

  • 10 John B March 28, 2017, 5:18 pm

    Handy tip: If the sales are less than 4*allowance (ie 44400) you only need to mention them on a tax return if there is a taxable gain. If sales are above that you need to report them even if there is no tax to pay.

  • 11 The Investor March 28, 2017, 6:11 pm

    @John B — Yes, I decided to leave that detail out, despite it being a factor for me most years in the past five. Do you think it should go into the article?

  • 12 John B March 28, 2017, 7:37 pm

    I was rather worried about calculating CGs for a drip-fed account. Finding the 4*allowance rule allowed me to avoid doing a tax return for 3 years as I emptied it, so I was very grateful for it, and its not widely known

  • 13 The Investor March 29, 2017, 10:06 am

    @John B — Okay, cheers for the feedback, I’ve added a bit about the four-times rule. I do worry it’s getting a bit wordy, but I think you’re right we should include it… I’ve had to report my details even when below the CGT allowance on the basis of total sales (and it will happen quite often with property).

  • 14 edel March 29, 2017, 2:33 pm

    Thank you for this article – I had a lot of questions about investing outside of an ISA/SIPP (if I ever have enough money to do that!) and this article is a wonderful guide for someone with no clue so thank you! and thank you as always for your time taken in doing these wonderful articles! This site is a wealth of information!

  • 15 Paula March 31, 2017, 10:29 pm

    Great article and very timely as I’m thinking of selling shares I have in a taxable account. Was aware of CGT allowance but not the 4* allowance/rule. Also a reminder to use CGT allowance before the tax year ends (next week!).

  • 16 UXR April 7, 2017, 8:21 pm

    Do the same capital gains and dividends allowances apply to shares held with a stockbroker abroad?

  • 17 The Investor April 8, 2017, 9:18 am

    @UXR — I’m not sure about assets literally held overseas, I’ve never done it. You do have to pay UK taxes on foreign assets held with UK brokers — the fact that you’ve bought say US stocks is irrelevant from HMRC’s perspective. I would presume the same is true if you hold them with a foreign broker, unless you’re doing something tricksy with residency and so forth that is beyond my domain.

    Watch out for withholding taxes, too. This is where foreign governments will tax you on those overseas assets. Sometimes you can avoid such double taxation by filling in the appropriate forms. See these two articles for more on your questions:

    http://monevator.com/expat-investing-and-tax-us-and-uk/

    http://monevator.com/withholding-tax-on-dividends/

  • 18 UXR September 9, 2017, 5:41 pm

    @The Investor – Thanks. I actually had this clarified with a tax accountant few weeks ago.

    Dividends / gains from shares held abroad do not count against UK allowances. Withholding taxes paid (the minimum that one needs to pay in majority cases – certainly in mine) can only be deducted against gains and dividends in the UK that are ABOVE the allowances limit in the UK (£11,100 on gains and £5,000 on dividends). In other words, one needs quite a sizeable investment in the UK (which also has to be outside ISA), before one can get back withholding taxes paid abroad…

  • 19 The Investor September 9, 2017, 9:34 pm

    @UXR — Thanks for coming back and sharing that. Hopefully some other readers of this page in a similar predicament to you will find your sleuthing helpful in the future. 🙂

  • 20 Alex P September 11, 2017, 8:36 pm

    Hello all,
    Does anyone on this thread use software to work out how to use their CGT allowance? My circs are as follows: I’m going to sell a 2nd home. The profits will prob all be fed into the Vanguard FTSE Global All Cap Index Fund, so only one fund. My ISAs are already spoken for, so the proceeds will go into a trading account. Each year that a profit is possible (i.e. if the market goes up!), I’ll want to sell whatever is required to use all of my CGT allowance. Obv the price of a unit will change daily, but there must be useful software that, with the requisite data entered, will tell me how many units to sell to achieve a profit of, say £11,100 or whatever the limit is.

    Any ideas? I’d love to know how anyone else does it.

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