What is capital gains tax?
Capital gains tax (CGT) is a tax on the increased value of your possessions - such as a second home, antiques or shares - during the time you have owned them.
Any tax is due when you dispose of them, usually by selling them or giving them away.
In our video, we explain how capital gains tax works and how much you'll pay.
Capital gains tax rates for 2018-19
There are two different rates of CGT - one for property and one for other assets.
How much you pay will depend on the asset you've made a profit on and your tax band.
|Tax bracket||CGT rate on assets||CGT rate on property|
|Higher or additional-rate payer||20%||28%|
CGT allowance for 2018-19
The capital gains tax allowance in 2018-19 is £11,700. This is the amount of profit you can make from an asset this tax year before any tax is payable.
If your assets are owned jointly with another person, you can use both of your allowances, which can effectively double the amount you can make before CGT is due.
If you are married or in a civil partnership, you are free to transfer assets to each other without any CGT being charged.
The table below explains your CGT allowance for the tax years 2017-18 and 2018-19.
|CGT allowance for an individual||£11,300||£11,700|
|Couple's allowance (married or in a civil partnership only)||£22,600||£23,400|
However, if you choose to transfer any of your assets to your partner, bear in mind that if you later sell the asset, you'll be charged based on the gain made during the period it was owned by you as a couple, rather than the gain made individually.
If you don't make full use of your CGT allowance in a given tax year, you aren't allowed to carry it forward to the next.
- Get a headstart on your 2017-18 tax return with the Which? tax calculator - tot up your bill and submit directly to HMRC.
When do you need to pay CGT?
You need to have made a certain amount of profit on your items to be taxed on them. This amount depends on whether you're a basic-rate or higher-rate taxpayer, and what the current tax-free allowance is for the tax year.
Typical investments that you might have to pay capital gains on include:
- a second property or buy to let
- shares and funds, unless they're held in an Isa or pension
- the sale of a business
- valuables such as jewellery, antiques and art
You don't have to pay CGT if you sell a car, or if you make a profit on selling your own home.
How do you calculate your CGT bill?
If your income makes you a basic-rate (20%) taxpayer, but you have made large enough capital gain to push you into a higher-rate tax bracket, you will pay the higher rate of CGT on the amount that takes you over the threshold.
It works like this:
Work out how much taxable income you've earned from your salary, pension or other type of income.
You can do this by deducting your tax-free personal allowance (£11,850 in 2018-19) from your total income.
Calculate your taxable capital gain by deducting the tax-free CGT allowance (£11,700 in 2018-19) from your profits.
You'll only pay CGT on the gain you make from an assets, rather than the sale price.
That means you're allowed to deduct the price you originally paid for it, as well as any additional costs involved with buying and selling it.
You're also allowed to deduct the costs of improving assets, but not the costs of maintaining them (though if you rent them out, maintenance costs may be deductible against any income tax you are charged from the rental income).
Add your taxable capital gain to your taxable income.
For a basic-rate taxpayer, the maximum taxable income you can earn is £34,500 in 2018-19. This is the higher-rate threshold (£46,350) minus the tax-free personal allowance (£11,850).
If your taxable income and your taxable capital gain added together is less than £34,500, you’ll pay basic-rate CGT (10% on most investments, 18% on second homes).
If the two figures added together put you over a higher tax threshold, you’ll pay the basic-rate (10% or 18%) on the part up to the threshold, and the higher rate (20% or 28% for second homes) on the rest.
How to calculate capital gains tax: an example
This can be complicated to work out, so we’ve put together an example.
Say, you earn £40,000 a year and sell some shares for £25,000, after buying them for £5,000 two years ago. This gives you a profit of £20,000.
If you're not sure what your profit is, see our guide on how to calculate your capital gains tax.
- Your total taxable income is £40,000 - £11,850 = £28,150
- Your taxable gain is £20,000 - £11,700 = £8,300
- Your taxable income and taxable gain total = £37,200
- The first £6,350 of your profit (£34,500 - £28,150) is taxed at 10%
- The final £1,950 of profit from the shares will be charged at 20%
So your total CGT bill is:
£635 (10% of £6,350) plus £390 (20% of £3,700) = £1,025.
Deducting losses from your CGT bill
CGT is charged on your total gains each tax year. So if you make a profit when selling one item, but a loss when selling another, you can deduct the loss from the gain before working out how much tax you owe.
While you can't carry forward any unused allowances, you are allowed to carry forward any losses that haven't been used to offset gains.
Even if you don't owe any CGT, it's important to submit details of losses in your tax return to make it easier to offset them against a potential gain in future years.
When is your payment due?
You can report capital gains to HMRC via the Report Capital Gains Tax online service from the government.
Alternatively, you can file a self-assessment tax return.
If you usually fill in a tax return, you must also report any capital gains, regardless of whether you've already used the online service.
You also need to include how you worked out each capital gain. If you have lost money through an investment (for example, selling a second home at a loss) you should also include this on your tax return.
Under current rules, any CGT due on the sale of property is payable by 31 January after the end of the tax year in which the sale occurred, which will generally be the same date you file your tax return.
Depending on the date of the sale, this can give you between nine months and 18 months to pay.
But note that under draft legislation proposed by the government, CGT on property sales will be payable within 30 days from April 2019 onwards.
What profits are tax-free?
You don’t have to pay tax on all capital gains. Those listed below are tax-free:
Capital gains tax on cars
- the sale or gifting of private cars - ie not for cars you use for business
Capital gains tax on gifts to spouses or charity
- gifts between husband and wife or registered civil partners, although tax may be due later if the new owner sells the item
- gifts to charities
Capital gains tax on property sales
- the sale of your only or main home
- the sale of a buy-to-let or second home which was your main home within the past 18 months
- Find out more in our CGT on property sales guide.
Capital gains tax on personal possessions
- personal possessions (sometimes called personal ‘chattels’) such as antiques, worth no more than £6,000. If you sell a set (of chairs, for example), the £6,000 limit applies to the set, not each item.
- possessions with a useful life of 50 years or less (known as 'wasting assets'), for example a boat.
- Find out more in our CGT and possessions guide
Capital gains tax (CGT) on financial products
- betting, pools and lottery winnings
- Isas or Peps
- UK government gilts and premium bonds
- National Savings & Investments products pensions and child trust funds
- proceeds from life insurance policies, unless bought second-hand
- most corporate and local authority bonds you’ve owned directly (rather than holding them in an investment fund)
- Building society permanent interest-bearing shares (Pibs) and Sharia-compliant equivalents
- shares while held in approved share incentive plans through your employment
- some schemes to encourage investment in new and growing businesses
Capital gains tax (CGT) and inheritance
- whatever you leave on death (though inheritance tax may be payable instead).
How can your cut your CGT bill?
If you'd like to minimise the amount of CGT you need to pay, you may consider the following tips.
Consider transferring assets into joint names if you're married or in a civil partnership. By transferring an asset into joint ownership, you can both make use of your tax-free allowance so that up to £23,400 of any gain can be tax-free in 2018-19 (£22,600 in 2017-18). But the transfer to your spouse or partner must be a genuine outright gift.
Investing in paintings, antiques and other collectibles can be tax-efficient, especially where they are not treated as a set and so can be sold piece by piece, with each item qualifying for the £6,000 exemption.
Unmarried partners can each nominate a different property as their main home. You can then benefit from tax relief on both. Married couples and civil partners must choose just one, however.
If possible, live in a property before letting it out. If the property is your main home for a time period before you sell it, you can potentially reduce the CGT bill when you eventually sell it. See our guide to capital gains tax and property.
If you immediately sell employee shares that you get through a save-as-you-earn (SAYE) share option scheme, company share option scheme or enterprise management incentive scheme, you may have a CGT bill. Instead, consider selling in several tranches so that each year’s gain is within your annual tax-free allowance of £11,700 in 2018-19.
If you get shares through a SAYE share option scheme or a share incentive plan, you have 90 days to transfer them tax-free to an Isa or pension. Gains when you eventually sell will then be tax-free.
Get a personalised answer to your tax questions
The Which? Money Helpline offers independent one-to-one guidance on all kinds of tax queries, including those surrounding capital gains tax. If you're not a Which? member and you'd like to get unlimited access to the helpline, you can try Which? Money for two months for £1.