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Confused about Capital Gains Tax? In this guide we’ll be explaining who pays Capital Gains Tax, when and how to pay, as well as current CGT rates and allowances. 

What is Capital Gains Tax?

Capital Gains Tax (CGT) is a tax paid when you “dispose” of an asset that’s increased in value. If the asset is subject to CGT, you will pay tax on the profit you have made, not the full amount of money you receive.

HMRC gives the following example:

You bought a painting for £5,000 and sold it later for £25,000. This means you made a gain of £20,000 (£25,000 minus £5,000).

In this example, you would be required to pay CGT on the gain of £20,000.

Not all assets are subject to Capital Gains Tax and you also don’t need to pay if all your gains in a tax year fall under your tax-free allowance.

Remember, although disposing of an asset usually means selling it, you will also be required to pay CGT if you:

• Give the asset away or transfer it to someone else
• Swap it for something else
• Receive compensation for it (e.g. an insurance payout if it has been lost or destroyed)

Who pays Capital Gains Tax?

You must pay Capital Gains Tax when you dispose of “chargeable assets”. These are:

• Most personal possessions worth £6,000 or more (including jewellery, paintings, antiques, coins and stamps and sets of things – e.g. matching vases)
• Property that’s not your main home (e.g. a buy-to-let property or second home)
• Your main home IF you let it out, use part of it exclusively for business purposes (this does not include a home office) or if the total area is more than 5,000 square meters
•  Shares that are not in an ISA or PEP
• Business assets (including land/buildings, plant machinery, shares, registered trademarks and fixtures/fittings)
• Some cryptoasssets (i.e. cryptocurrency and bitcoin)

There are various tax reliefs that may be available, depending on the asset and you don’t need to pay if the gains fall below your annual tax-free allowance.

Remember, if you dispose of an asset you jointly own with someone else, you have to pay Capital Gains Tax on your share of the gain.

CGT exemptions

You don’t need to pay Capital Gains Tax on the following:

• Gains that fall below your annual tax-free allowance (see CGT rates and allowances section for details)
• Gifts to your husband, wife or civil partner (unless you were separated and did not live together during the tax year or gave them goods for their business to sell on)
• Gifts to a charity
• ISAs or PEPs
• UK government gilts or premium bonds
• Winnings from gambling (including lotteries, betting and pools)

Capital Gains Tax rates and allowances 2020/21

Tax-free allowances 2020/21

The Capital Gains Tax allowances for 2020/21 are:

• £12,300
• £6,150 for trusts

Capital Gains Tax rates 2020/21

Higher rate taxpayers

• 28% on your gains from residential property
• 20% on your gains from other chargeable assets

Basic rate taxpayers

The rates are a little more complicated to work out for basic rate taxpayers. To determine how much CGT you need to pay you will need to:

1. Work out your taxable income
2. Work out your total taxable gains
3. Deduct your tax-free allowance from your gains
4. Add this amount to your taxable income
5. If this amount is within the basic Income Tax band you’ll pay 10% on your gains (or 18% on residential property). You’ll pay 20% (or 28% on residential property) on any amount above the basic tax rate. You can view the current tax band amounts here.

If you have gains from both residential property and other assets you can use your tax-free allowance against the gains that would be charged at the highest rates (for example where you would pay 28% tax).

HMRC gives the following example:

Your taxable income (your income minus your Personal Allowance and any Income Tax reliefs) is £20,000 and your taxable gains are £12,600. Your gains are not from residential property.

First, deduct the Capital Gains tax-free allowance from your taxable gain. For the 2020 to 2021 tax year the allowance is £12,300, which leaves £300 to pay tax on.

Add this to your taxable income. Because the combined amount of £20,300 is less than £37,500 (the basic rate band for the 2020 to 2021 tax year), you pay Capital Gains Tax at 10%.

This means you’ll pay £30 in Capital Gains Tax.

Trustees/businesses

Trustees or personal representatives of someone who’s died pay:

• 28% on residential property
• 20% on other chargeable assets

You’ll pay 10% if you’re a sole trader or partnership and your gains qualify for Business Asset Disposal Relief.

Talk to the experts

We know getting your head round who pays Capital Gains Tax can be confusing. Our team of experts are always on hand to answer queries, as well as offer advice and guidance on how to utilise tax reliefs to ensure you are paying the most efficient rate of Capital Gains Tax. Get in touch.

All information correct at time of going to print/live and on the best knowledge and understanding of the author at the time. This article is for general information only and does not constitute financial advice or recommendations for individual circumstances. No responsibility is taken for any actions taken on the base of the information within this article.