How Much is the Capital Gain Tax Allowance?
Capital gains occur when you sell an asset at a higher price than what you originally paid for it. This could be anything from property to stocks. If you make a profit from selling something you own, you might have to pay capital gain tax.
Let's break down the basics of capital gains and how they work.
What are Capital Gain?
Capital gains are the profits made when the value of a capital asset increases and it is sold for more than the purchase price. Disposal of assets includes:-
- sale or gift of the whole or part of an asset
- exchange of an asset
- receiving a capital sum from an asset, such as compensation for damage to the asset or payments for giving up rights to the asset.
For Example,
If you bought a property for £100,000 in 2001 and its market value now is £250,000, then you made capital gains of £150,000. If you sell this property for £250,000, then you have to pay capital gain tax on your gain of £150,000.
UK Capital Gains Tax Allowances
You are only required to pay capital gains tax in UK on your total gains that exceed your tax-free allowance:
Annual Exempt Amount:
- UK Capital Gains Tax Allowance 2023/24: £6,000 for individuals and £3,000 for trusts.
- UK Capital Gains Tax Allowance 2024/25: £3,000 for individuals and £1,500 for trusts.
Note: If the AEA is not utilised in any particular tax year, then it is wasted.
Capital Gains Tax in UK Rates
CGT is paid at the normal rates unless the gain arises from the selling of a residential property. A residential property is one that people normally live in, whereas a commercial property is one that is used by a business.
Tax Rates
1. Normal Rates
- Basic rate band: 10%
- In excess of basic rate band: 20%
2. Residential Property Rates
- Basic rate band: 18%
- In excess of basic rate band: 28%
UK Spring Budget 2024
As per the UK Spring Budget 2024, the annual exempt amount for CGT was reduced from £6,000 to £3,000 effective from 6 April 2024. This shows a substantial decrease from the previous amount of £12,300, which was in effect before 6 April 2023.
In line with the government's objective of reducing taxes, a key measure for individual taxpayers is the reduction to 24% of the top rate of capital gain tax (previously 28%) payable on the disposal of residential property that is not the taxpayer’s main ‘home’ (private residence relief will continue to apply on disposals of taxpayers main residence).
The lower rate of 18% will remain for any gains arising that fall within an individual’s basic rate band. This measure is to have effect for chargeable gains accruing on or after 6 April 2024.
Payments on Account for UK Residential Property Disposals
When you sell UK residential property, you must report the sale to HMRC within 60 days of completion and pay any CGT due at the same time. Here's what you need to know:
Submission: Use the online system to submit a UK land return and pay the associated CGT.
Exceptions: You do not need to submit a UK land return if no CGT is due. This applies if:
- The gain is covered under private residence relief,
- The gain is less than the Annual Exempt Amount (AEA), or
- The property is sold at a loss.
Inclusion in Final Self-Assessment Tax Return
All disposals made during a tax year, including UK residential property disposals, must be included in your final tax return. Deduct any CGT payments already made on account from your total CGT liability to determine the final amount of CGT payable. If you are due for repayment, you can claim it when you submit your self-assessment tax return for the tax year.
Payment under Self-Assessment
CGT is typically payable under self-assessment in a single payment, along with any balancing payment for income tax. This does not apply to disposals of UK residential property. For the tax year 2023/24, the payment is due by 31 January 2025.
Bottom Line
When you know capital gains and how they are taxed, it can help you manage your finances better. Keep track of your gains and know when you need to report and pay taxes to avoid any surprises. Use our reliable capital gains tax calculator to estimate your CGT and ensure you're prepared for tax time.
FAQs
1. Do I have to pay tax on all capital gains?
No, you only pay tax on gains that exceed your tax-free allowance, known as the Annual Exempt Amount.
2. What is the Annual Exempt Amount?
For the tax year 2023/24, it's £6,000 for individuals and £3,000 for trusts. The capital gains tax allowance 2024/25 drops to £3,000 for individuals and £1,500 for trusts.
3. How are capital gains taxed?
The tax rate depends on the type of asset and your income level. For normal assets, it's 10% (basic rate) and 20% (higher rate). For residential property, it's 18% (basic rate) and 28% (higher rate).
4. What changes were made in the UK Spring Budget 2024?
The Annual Exempt Amount was reduced to £3,000, and the top rate for residential property gains was lowered to 24%.
5. Do I need to report all property sales?
No, you don't need to report if the gain is covered by private residence relief, is below the Annual Exempt Amount, or if you sold the property at a loss.
6. How do I include capital gains in my tax return?
Include all disposals made during the tax year in your self-assessment tax return and deduct any CGT payments already made.
7. When is the payment due for CGT under self-assessment?
For the tax year 2023/24, the payment is due by 31 January 2025.