Capital gains tax revenue reached a new high of £9.9bn in 2019-20, up from £9.5bn the year before, according to new HMRC data.
Despite this bigger bill, the number of people who had to pay capital gains tax (CGT) has continued to fall. Last year 265,000 taxpayers paid CGT, down from 276,000 in 2018-19 and 281,000 in 2017-18. The latest figures show that nearly 41% of CGT is paid by around 2,000 taxpayers who made £5m or more in taxable gains.
However, with the CGT allowance set to remain at £12,300 until 2026, it’s expected that more and more people will find themselves with a CGT tax bill in the coming years.
There was much speculation about an overhaul to the CGT system last year, after Chancellor Rishi Sunak ordered an urgent review from the Office of Tax Simplification (OTS) in July 2020. The OTS has since delivered two reports suggesting ways CGT could be altered, but no changes have yet been announced.
Here, Which? explains how capital gains tax works, and how you can make sure you’re not paying more than you need to.
What is capital gains tax?
You might need to pay CGT if you make a profit after selling a valuable asset or assets, and the profit exceeds your CGT allowance (£12,300 for 2021-22, unchanged from 2020-21).
The rate you pay depends on the kind of asset you’re selling and the rate of income tax you pay. Basic-rate taxpayers (whose income is between £12,501 and £50,000 in 2021-22) are charged 18% on property sales, and 10% on the sale of assets – including personal possessions, plus shares, bonds or funds.
Higher and additional-rate taxpayers are charged 28% on property and 20% on assets.
You won’t be charged CGT if you’re selling your main home – instead, the tax applies if you sell a second home or buy-to-let property.
- Find out more: capital gains tax rates and allowances
Four ways to reduce your CGT bill
In the March Budget, the Chancellor announced the CGT allowance would remain at £12,300 – one of many tax allowances that would be frozen until 2026.
As a result, CGT bills are likely to increase as prices continue to rise and outstrip the frozen allowance, so it’s important to make sure you’re not paying any more tax than you need to.
1. Use your spouse’s allowance
If you’re married or in a civil partnership, you can transfer your assets into joint names to make the most of both of your CGT allowances, which will be £24,600 collectively.
However, the transfer to your spouse must be a genuine outright gift for this to apply.
2. Deduct your costs…
CGT is only chargeable on the profit you make when you sell a valuable asset, but as well as deducting what you paid for it, you can also deduct costs you’ve had to pay to maintain it – such as having antiques professionally cleaned.
You can also deduct costs you’ve incurred for selling the item, such as paying to have items listed at an auction.
3. …And your losses
As CGT is charged on your total gains, if you make a gain from selling one asset but a loss when selling another, you can deduct that loss from your overall gain when working out how much tax you owe.
What’s more, you can also carry forward any losses that haven’t been used to offset gains from previous years. This process is much easier if you make sure you submit details of your losses in your tax return each year.
4. Make the most of remaining reliefs
While changes that came into force in 2020-21 have pared down CGT reliefs, they’re still worth claiming if you’re eligible.
Private residence relief is still available, where CGT is waived for any periods where you’ve lived in the second home or buy-to-let property as your main residence. CGT is also waived for the nine months between you living in the property and selling it – this has been cut from 18 months.
Landlords who live in the same property as their tenant can still claim lettings relief, but this will be the lower of:
- the same as the amount you received in private residence relief
- the same amount as the chargeable gain you made from letting your home.
Things to bear in mind for your 2020-21 tax return
If you make a capital gain from selling a property, from 2020-21 onwards you can no longer wait until you file your main self-assessment tax return to declare it.
Instead, you must submit a ‘residential property return’ and make a payment on account – and this must be done and paid within 30 days of the sale. Failing to report and pay the tax on time might mean you’re charged interest on the tax due, and possibly an additional fine.
If you have other types of gains, and want to pay off the tax quickly, you can report these using the government’s ‘real time’ capital gains service. You’ll need your Government Gateway ID and password, and the gains must be declared by 31 December of the following tax year the gain was made; so any gains made during 2020-21 must be reported by 31 December 2021.
You can report gains that haven’t come from the sale of a property on your self-assessment tax return.
File your tax return with the Which? tax calculator
After the huge amount of disruption caused by the coronavirus pandemic, it’s a good idea to be as organised as possible and get your 2020-21 tax return filed in plenty of time.
The Which? tax calculator is an easy-to-use, jargon-free online tool that can tot up your tax bill, remind you of expenses and allowances you might have forgotten, and submit your return directly to HMRC.