Capital gains tax: what it is, how it works & what to avoid (2024)

Summary

• Capital gains tax is a tax on gains made on the value of your assets.

• CGT is not automatically deducted by HMRC, so you need to report it.

• Anytime you sell a taxable asset and receive more for it than you paid, CGT will usually apply.

• There are a few points to consider to help reduce your capital gains tax bill and it may be worth getting financial advice.

What is capital gains tax?

You may have heard of capital gains tax (CGT), but do you know what it is and how it works?

Capital gains tax is a tax on gains made on the value of your assets (things that you own).

This can include the sale of shares, for example, or the sale of business assets or a buy-to-let property.

It can also apply to valuables worth £6,000 or more (excluding your car) if you sell them at a profit. This also includes gains made on cryptocurrency sales.

How does capital gains tax work?

Unlike income tax, CGT is not automatically deducted by HMRC, so you need to report it.

There are many different fiscal triggers, so it is important to be aware of what needs to be reported.

If you don’t provide accurate reports, you may pay a fine that's bigger than your tax bill, should you fail to notify HMRC.

How much is capital gains tax?

CGT rates differ from income tax rates and are in two broad brackets: basic-rate payers and higher and additional rate payers.

In the 2024/25 tax year, the basic rate on residential property gains was 18% and 10% on all other assets.

The higher and additional rate of CGT is 24% on residential property and 20% on all other chargeable assets.

What is capital gains tax allowance?

When doing your tax return, you’ll be pleased to know that you have a CGT allowance.

It’s £3,000 for individuals (£1,500 for trusts) in the 2024/25 tax year, meaning you can make £3,000 of profit on your assets before the applicable rates kick in.

If you jointly own a taxable asset such as a second home, the allowance doubles to £6,000. For those who are married or in a civil partnership, assets can be exchanged between you.

However, if you transfer assets to a partner and make a gain from this at a later date, the CGT you pay will be based on the total time you owned the asset(s) together rather than the date of transfer.

You usually don't pay CGT when you sell your main home but will pay it when you sell a second property or main home if you've let it out, used it for business, or it's very large. The CGT rate would either be 18% or 24%, depending on your tax bracket.

How much capital gains tax on stock and shares depends again on your tax bracket, but any gains will be taxed at either 10% or 20%.

How to pay tax on cryptocurrency in the UK

Crypto investors need to report gains on cryptocurrency on their annual tax return or they can use HMRC’s real-time CGT reporting service to pay tax.

Accurate record-keeping is really important for anyone who is self-employed, but crypto investors also need to keep accurate records for tax purposes.

HMRC says crypto investors must declare the following:

• The type of tokens

• The date you disposed of them

• Number of tokens you’ve disposed of

• Number of tokens you have left

• Value of the tokens in pound sterling

• Bank statements and wallet addresses

• Records of the pooled costs before and after you disposed of them

Getting the right financial advice for your circ*mstances is key. Unbiased can match you with a financial adviser who can help ensure you pay the correct amount of tax.

How do you calculate capital gains tax?

While you can work out if you need to pay capital gains tax using these easy steps, if you have a large number of taxable assets, this may take some time.

Alternatively, you can use the capital gains tax calculatoron the gov.ukwebsite.

This page also lists some of the deductions, reliefs and special circ*mstances to consider, which we also cover below.

Filling out tax forms wrong can result in headaches, interest and fines, but getting it right can be financially rewarding.

An accountant will be able to analyse your income and outgoings, as well as flag any tax relief when helping you with your tax return.

How do you pay tax on capital gains?

If you’re wondering how to pay capital gains tax, you need to complete a self-assessment tax return to report CGT. Otherwise, you can use the UK government’s CGT service to pay what you owe immediately.

Find out the deadlines for paying capital gains tax in the next section.

When do you pay capital gains tax?

Anytime you sell a taxable asset and receive more for it than you paid, CGT will apply (although there are a few exceptions).

CGT on second homes (or non-primary residential property) must be declared within 60 days of the sale and any gain being made.

If you’re including CGT within your annual tax return, the online deadline is 31 January, while the deadline for paper tax returns is 31 October.

The exception is the sale of residential property – this should be reported to the government within 60 days.

If you’re using the HMRC’s real-time CGT service to pay, this should be submitted by 31 December in the year after your gains have been made. You must also pay CGT on any cryptocurrency gains that are realised.

Learn more:Can I avoid capital gains tax on my buy-to-let property?

How do you avoid capital gains tax?

The short answer is that if you owe CGT, then you can’t and shouldn’t avoid paying them.

Not declaring or paying what you owe is an offence that could land you with a fine, possibly leaving you to pay more than you originally owed.

However, there are a number of reliefs and conditions which, if you receive the right financial advice, may mean the amount of CGT you pay is lower.

How to reduce your capital gains tax bill

Here are a few things to consider when it comes to reducing your capital gains tax bill.

It’s important to obtain expert guidance to help you understand your tax relief opportunities and make sure you pay what you owe.

1. Transfer assets to your partner: This means that you both take advantage of your full pre-tax allowance of £3,000.

2. A loss can be a gain: Make sure any losses are declared to HMRC as these will offset your gains to give a revised contribution amount.

3. Use your CGT allowance: CGT allowances can’t be rolled over into the following tax year, so it really is a case of using it or losing it.

4. Check if you qualify for principle private residence (PPR): PPR allows you to sell a residential property that is or was your main home without paying CGT, provided certain conditions are met.

5. Be aware of your wasted assets: These have a life of under 50 years, such as antique clocks, vintage cars, or caravans.

6. Invest your money in an enterprise investment scheme (EIS) or individual savings account (ISA): These both provide a tax-free home for your savings.

7. Give to charity: If you give shares, land or property to charity then, income and CGT relief is available.

8. Contribute to a pension: This may alter your CGT bracket, meaning you pay less.

9. Be organised: Knowing what your taxable assets are (and aren’t), what your allowance is and how and when to pay CGT can all affect how much you end up contributing.

10. Where both spouses or civil partners have used their annual CGT allowance, ensure assets are sold by the individual who pays the lowest marginal rate of tax.

Seek expert financial advice

Managing CGT can seem daunting, but with the right knowledge and strategies, you can effectively reduce your tax bill.

By understanding how CGT works, using your allowances, and seeking expert advice, you can ensure you’re paying the right amount. Stay informed, keep accurate records, and take advantage of reliefs and exemptions to minimise your CGT liability.

Unbiased has 27,000 financial professionals who can help. Let us match you to a suitable financial adviser.