Everything you need to know about capital gains tax

Everything you need to know about capital gains tax

With the coronavirus pandemic still playing out but vaccines now being given in the UK, talk has turned to how the increased national debt will be paid for.

That has led to inevitable speculation on tax increases, including capital gains tax (CGT).

But what is CGT, how does it work, and could it be increased in 2021? You’ll find the answers here…


What is capital gains tax?

Capital gains tax (CGT) is the tax paid when you make a profit from selling something that has increased in value.

The tax you pay is on the ‘gain’ – the difference between what you paid for something and what you sold it for – rather than the asset’s overall value.


Capital gains tax is usually due on:


  • Personal possessions worth more than £6,000
  • Property that isn’t your main residence
  • Your main residence if you have let it out or used it for business
  • Shares outside of ISAs and PEPs
  • Business assets


Capital gains tax on property

When you sell your home, you don’t pay capital gains tax if it’s your main residence.

However, if you’re a landlord and you sell a rental property that isn’t your main home, or your main home is rented out to someone else when you sell it, you could be liable for capital gains tax.

If you inherit a property, you don’t pay capital gains tax on it until you sell it, when you’ll pay tax on the difference between its value when you inherited it and the price you sell it for.


The capital gains tax allowance

The amount of tax-free allowance for capital gains tax is £12,300 for the 2020-21 tax year.

This means you won’t pay any tax on the first £12,300 profit you make from the sale of any assets you own.

If you make more profit than this, you’ll need to complete an annual self-assessment tax return and pay the capital gains tax you owe.

With the sale of property that isn’t your main residence, you must pay your capital gains tax bill within 30 days of the date of sale.


The UK capital gains tax rate

The rate of capital gains tax you’ll pay depends on your total taxable income.

If you pay the higher rate of income tax, which is due on earnings between £50,000 and £150,000, or the additional rate, which is payable on earnings above £150,000, you’ll pay the following rates of capital gains tax:


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


That means if you sold a rental property for £300,000, having purchased it for £200,000, you’d be liable for capital gains tax on £87,700 (£100,000 minus the £12,300 allowance):


  • 28% of £87,700 = £24,556


That would result in a capital gains tax bill of £24,556.

If you pay the basic rate of income tax, due on earnings between £12,500 and £50,000, you’ll pay the following rate of capital gains tax as long as your total taxable income doesn’t exceed £50,000:


  • 18% on gains from residential property
  • 10% on gains from other assets


Any amount over £50,000 would be subjected to the higher 28% rate.

So, if you earn £30,000 in income and sold the same rental property as above with a profit of £100,000, your capital gains tax bill would be £22,556:


  • Minus £12,300 tax free allowance = £87,700 taxable gain
  • £30,000 income, so £20,000 of gain taxed at 18% = £3,600
  • Remaining £67,700 gain taxed at 28% = £18,956
  • Total CGT bill = £22,556


However, there are other factors that could affect your final bill, including costs of sale and any improvements you may have made to the property which are deductible. You can calculate the amount of capital gains tax you owe using the government’s online calculator.


Changes to capital gains tax in 2021

Currently, no changes to capital gains tax in 2021 have been announced.

However, tax changes in general are expected as the UK looks to pay down substantial borrowing due to the coronavirus pandemic.

Those tax changes could affect the rules on capital gains tax.


Possible changes to the capital gains tax allowance

One area of capital gains tax that could be changed in 2021 is the amount of tax-free allowance on offer.

Currently set at £12,300, or £24,600 for assets owned by couples, the allowance could potentially be reduced or even removed completely.


Possible changes to capital gains tax rates

Currently, basic rate taxpayers pay 18% capital gains tax on property, while higher and additional rate taxpayers pay 28%.

Those rates could be increased or even aligned with income tax, meaning basic rate taxpayers would pay 20% on all gains, while higher rate taxpayers would pay 40%, rather than those current 18% and 28% rates.


Further reading…

If you’re thinking of investing in property in 2021, take a look at our guide to buy-to-let mortgages.

Your home may be repossessed if you do not keep up repayments on your mortgage or loans secured on it.