Capital Gains Tax

CGT is confusing. Who pays it? How is the gain calculated? How do I pay it? What reliefs are available?

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CGT. What is it?

Capital Gains Tax (CGT) is paid whenever an asset is sold that has increased in value.

IMPORTANT NOTE – trading stock is not Capital! If you buy toilet rolls to sell on eBay this is trading stock and not subject to CGT. Similarly, if you are a property trader who flips properties, the sale of these properties is not subject to CGT but instead to Income Tax/Corporation Tax.

The gain is simply the sale price less the purchase price with certain allowances.

Working out the gain.

EXAMPLE – Gwenda purchased a house in Abergele in 2010 for £85,000 and has been renting it out since. She incurred solicitors costs of £1000. In 2023 she decides to sell and agrees with a local buyer for £170,000. She pays the estate agent £1,500 and solicitors costs of £2,000.

So Gwenda will pay CGT on £80,500. But how much tax is that exactly? Well the answer depends on her other earnings in the tax year.

Working out the tax bill.

Some clients look up the CGT rates for residential property and see that they are 18% for basic rate taxpayers and 28% for higher rate tax payers. Gwenda earns £34,000 working for Conwy council so she’s a basic rate taxpayer.

So she pays 18% x £80,500 right?

Wrong! First, we need to work out how much of her basic rate band is left. The basic rate band is all income from the point we start paying tax (£12,570) to the point we start paying higher rate tax (£50,270) – the difference being £37,700

So with £16,270 of her basic rate band remaining, we can work out the tax payable.

Gwenda will pay 18% on any gains covered by her remaining basic rate band and 28% on everything over, giving her a tax bill of £19,233.

It’s important to note that as the calculation is done when the house is sold, rather than at the end of the tax year, the figure for Gwenda’s PAYE income is essentially an estimate. It may require adjustment in her self assessment if, for example, she gets a bonus or overtime.

Advantages for couples

Gwenda is single, so all the gain is hers. If she were married, the property would be jointly owned and the gain would be split between them. This is usually 50/50, but can be changed to difference proportions with a few simple steps. This presents some useful tax planning opportunities where the income levels of each partner are significantly different.

Annual Allowance

Everyone gets an annual allowance. In 2021/22 this was a useful £12,300 however for tax year 2022/23 this reduces to £6,000 and to a paltry £3,000 for 2024/25.

Reliefs

CGT is not generally payable when selling a home you live in. This is covered by Private Residence Relief (PRR). If you USED to live in the house but have been renting it out, you’ll get PRR based on the proportion of time you lived there.

See our separate section on PRR.

For Holiday Lets, a separate relief applies. Business Asset Disposal Relief (BADR) allows your gains to be taxed at just 10% for qualifying holiday lets. It’s a complicated process however; speak to us for a fixed price quote.