How does the capital gains tax operate and what is it?

What is capital gains tax and when is it due? Chancellor Rachel Reeves raised the rate in the 2024 Autumn Budget

When assets like stocks, real estate, and other investments are sold, the profits are subject to capital gains tax (CGT).

More UK investors will be impacted by CGT as a result of recent reductions in allowances. In April 2023, the tax-free allowance on capital gains was cut from 12,300 to 6,000, and in April 2024, it was further cut to just 3,000.

More individuals are being subject to CGT as a result of declining allowances and frozen income tax thresholds. To further increase the tax burden, Chancellor Rachel Reeves raised CGT rates in the Autumn Budget.

We examine the tax in greater detail in light of this. How much is your debt, when is it due, and what is capital gains tax?

What are the UK's capital gains tax rates?

In the UK, your income tax band and the time you realized the gain determine the CGT rate you pay.

Basic-rate taxpayers pay 18 percent on gains as of October 30, 2024, while higher- and additional-rate taxpayers pay 24 percent. These new rates went into effect right away after being revealed in the previous year's autumn budget. Rates were 10% for basic-rate taxpayers and 20% for higher-rate and additional-rate taxpayers prior to October 30.

Residential property CGT rates are still 18 percent and 24 percent, respectively, as Reeves made no changes to them. This indicates that the rates for residential properties and the main rates are now equal. CGT is not required for your primary residence, but it is for second homes, such as vacation homes and buy-to-let properties.

The aforementioned rates are only applicable to the part of your gains that surpasses the tax-free allowance, also referred to as your annual exempt amount. For the 2024 - 2025 tax year, this amount is set at £3,000. Therefore, you only pay CGT on gains that exceed this amount.

The capital gains net is catching more and more people when they sell or give away shares, real estate, or other taxable assets, according to Sean McCann, a chartered financial planner at NFU Mutual.

Many shareholders who realize small gains annually to supplement their income are being significantly impacted by this and are now facing a tax bill.

You pay capital gains tax when?

CGT might be owed when you sell an asset for a profit, like buy-to-let real estate or shares held outside of an ISA wrapper. When you sell your house, however, you do not have to pay capital gains tax because it is not due on your primary residence.

Giving away an asset to someone other than your spouse or civil partner may also result in a CGT bill. For capital gains tax purposes, the gain it has made since you purchased it will typically be evaluated. Taxes are typically due if you donate assets with gains exceeding £3,000.

Selling something for less than its value, like a second home, is one way for some people to avoid paying capital gains tax. However, the investment platform Hargreaves Lansdown states that in these situations, CGT will be owed on the full market value.

CGT may also apply if you sell something on a website like Vinted or eBay for a profit. Hargreaves Lansdown notes that capital gains tax may be due if you sell an item valued at £6,000 or more and earn a profit of more than £3,000. Antiques, paintings, and jewelry are examples of this. It also includes groups of items that, if sold to the same buyer, will be valued collectively. But typically, it excludes vehicles and items with short lifespans, such as clocks.

Because selling or spending cryptocurrency (after its value has increased) is considered a capital gain, investors should also be on the lookout for a possible CGT bill.

The tax you pay is determined by your income tax bracket. When you file your annual self-assessment tax return, it's critical to maintain records of your transactions so you can determine any capital gains tax due.

How to figure out capital gains taxes.

Determine your taxable gain by deducting the asset's purchase price from its sale price in order to determine your CGT obligation. Next, subtract from this gain your CGT allowance, which is £3,000 for the 2024 - 2025 tax year. Depending on your tax band and the type of asset, the remaining sum might be subject to CGT at the applicable rate. For more thorough instructions on figuring out CGT, go to the UK government's website at gov . uk.

Let's take an example where you are a higher-rate taxpayer and you sold shares this month and made £10,000. Once your 3,000 annual tax-free allowance is subtracted, you would pay 1,680 in CGT on your gains (24 percent of 7,000).

The workings of capital gains tax are explained in BFIA Investment Tutorials on YouTube. For more information, see YouTube Watch On.

What exemptions are there from CGT?

In addition to your primary residence and yearly allowance, there are several CGT exemptions available.

The ability to transfer assets to your spouse or civil partner without incurring this tax is one of the primary CGT exemptions. If both partners use their separate allowances, this essentially enables you to give your partner assets in order to double your CGT allowance.

Investments held in pensions and individual savings accounts (ISAs) are also exempt. Because these investment wrappers are tax-efficient, any profits made inside of them are not subject to CGT.

You can support causes you care about and possibly lower your tax bill by donating assets like shares or real estate to charities, which are also exempt from CGT.

Jewelry and other personal goods (chattels) with sales proceeds under 6,000 are exempt from CGT. "Gilts, foreign currency held for your use, and private motor vehicles, including vintage passenger cars, are additional exempt assets," McCann states.

How can your capital gains tax bill be lowered?

Your CGT bill can be lowered in a few ways.

As previously stated, CGT does not apply to transfers of assets between partners. You can combine your allowances if you own an asset together, like a second home. This can maximize your tax-free capital gains allowance, especially if the assets are sold by the partner with the lower tax rate.

Pensions and ISAs are two more ways to lower CGT. Because gains made inside these tax-efficient wrappers are not subject to CGT, you can protect a sizable amount of your investments from future sales tax.

Apply "bed and ISA."

Transferring investments into an ISA shields dividends and future gains from taxes. The procedure, called "bed and ISA," entails selling assets and then buying them back right away inside an ISA. This enables you to shield any future growth from CGT after crystallizing gains up to your yearly CGT allowance.

"Capital gains can be offset by capital losses," says Myron Jobson, senior personal finance analyst at Interactive Investor. You can lower your total tax obligation by using losses from investments to offset gains from other investments. Within four years of the conclusion of the tax year in which the sale took place, be sure to report any losses to HMRC.

Stripping the sale of lucrative assets over a number of tax years is another strategy to control your CGT bill.

Several years of CGT allowances can be maximized by selling some of your investments in different tax years.

The CGT and dividend allowances operate on a use-it-or-lose-it basis, just like the ISA allowance, according to Jobson. Therefore, distributing capital gains over two tax years is one way for people who are facing a tax bill to postpone them. It is theoretically possible for them to sell half of their position on April 5 and the other half on April 6, which is the beginning of the new tax year.