If you dispose of any assets which have increased in value over time, you will most likely incur a Capital Gains tax liability.
How much CGT do you pay?
This depends on your income tax band.
- First of all, the first £12,300 of gains are tax-free (for the 2022/23) tax year.
- For any gains which fall within the lower-rate tax band, you are taxed at a rate of 10%.
- For gains with fall into the higher-rate tax band, you pay 20%.
- If you make a loss on the sale of a qualifying asset, you can deduct this loss from any gains you make during the tax year or carry across the loss to future years.
What don’t you have to pay CGT on?
- There is usually no tax paid on assets transferred to your spouse, or civil partner.
- If you sell your main home, you shouldn’t have to pay CGT on the gains (although you do on any other properties you may own). This is known as Private Residence Relief. You may decide to ‘switch’ the property you designate as your primary residence (as many MPs did during the expenses scandal), but understandably there are fairly clear rules you’ll need to abide by to prevent the system being abused.
- You won’t have a CGT liability if you sell any personal effects up to the value of £6,000.
- If you are disposing of qualifying business assets, you may be able to claim entrepreneurs’ relief on any gains you make and pay just 10% tax.
- The lifetime limit of claims under entrepreneurs’ relief has been reduced from £10m to £1m from 11th March 2020 onwards.
Calculating your CGT liability
- You should pay any CGT you owe via the annual self assessment process, by including details of your disposals on your tax return.
- To work out how much tax to pay, you firstly need to work out how much income you have earned from your normal employment during the tax year in question, and refer to the current income tax bands (see here).
- You then work out your CGT liability by subtracting any losses from your gains and subtracting the current CGT tax-free allowance (£12,300 for 2021/22).
- If, after using up your personal allowance, and adding your total income for the year, you haven’t reached the higher rate income tax threshold, then you’ll pay 10% CGT on any gains made within the basic rate band, and 20% thereafter.