What is the Capital Gains Tax Allowance?
The capital gains tax allowance represents the maximum amount of allowable profit before having to pay capital gains tax.
All individuals receive a capital gains tax allowance (also known as the annual exempt amount) at the start of each tax year on April 6.
Capital gains tax (CGT) is charged by the government on profits (sometimes referred to as a chargeable gain) earned from most investments.
CGT applies to various types of investments like a buy to let property, shares in a company or valuable jewellery.
The capital gains tax allowance is similar in a way to the tax free personal allowance (which is used against normal income) because it let’s you receive profits up to the allowances threshold before having to pay tax.
As a result you are only obligated to pay CGT on the profits exceeding the capital gains tax allowance in the tax year the gain was made.
How much is the capital gains tax allowance worth?
The capital gains tax allowance is worth £3,000 per person and can only be used in the tax year it is given.
Essentially any chargeable gain over the £3,000 CGT allowance is subject to capital gains tax.
The annual exempt amount is not an allowance that can be transferred to a spouse or carried forward into a future tax year so making use of it when you can is important.
It’s worth noting that the CGT allowance can be changed by the government with the CGT allowance previously set at the higher value of £6,000.
You can use the work out your gain .GOV calculator to help you calculate your capital gains tax liability.
What are the capital gains tax rates?
Capital gains tax rates are calculated based on the type of asset you have sold and the rate of income tax you pay on other income.
Most chargeable assets:
Most chargeable assets are subject to either a 10% or 20% CGT rate depending on your income bracket.
If your income falls under the basic rate you the CGT rate of 10% should be used while higher rate or additional rate taxpayers will face a 20% rate.
CGT rates for property:
For chargeable gains on the sale of qualifying residential property the CGT rates are 18% for basic rate taxpayers or 24% for higher and additional rate taxpayers.
BADR for the sale of a business:
If you have been the owner of your trading business for a minimum of two years and are considering selling either the entire business or a portion of it you may qualify for business asset disposal relief (BADR) which has a rate of 10%.
How do I use the capital gains tax allowance?
Understanding how to use your capital gains tax allowance is a good way to help calculate your liability.
How to use your CGT allowance:
- Calculate the amount of income that is subject to tax by subtracting your personal allowance and any other applicable income tax reliefs from your total income.
- Subtract your capital gains tax allowance from your total chargeable gains.
- Add this amount to your taxable income.
If the resulting amount falls within the basic income tax bracket you will be required to pay 10% on your gains (or 18% on residential property).
Any amount above the basic tax rate will be subject to a 20% tax (or 24% on residential property and 28%).
Can you carry forward the CGT allowance?
The captial gains tax allowance is not an allowance you can carry forward into a future tax year.
It doesn’t matter if you’ve made use of some or none of your annual exempt amount (within the year) you still won’t be able to retrospectivly make use of it.
It is a tax free allowance that automatically resets itself each tax year and is only applicable in the tax year it is given.
Does the CGT allowance affect other tax allowances?
The CGT allowance shouldn’t normally affect the value or use of other tax free allowances that you may be entitled to.
Other common tax free allowances that can be used at the same time as the CGT allowance includes the personal allowance for use against income, the dividend allowance, and personal savings allowance (PSA).
How to use the CGT allowance to reduce tax
Planning the use of your CGT allowance can lead to a reduced CGT bill or exempt you from paying any.
Splitting ownership:
One potential method for decreasing your CGT tax liability is by transferring an asset to your spouse or civil partner, or by dividing ownership with them.
Splitting the ownership of a chargeable asset allows both individuals to use their own capital gains tax allowance.
This allows for two CGT allowances to be set against the same capital gain resulting in a reduction of the overall CGT tax amount owed to HMRC.
Staggering the selling of assets:
Because you can’t carry forward any unused allowance from the previous tax year you could choose to sell your assets gradually over several years (rather than all at once).
In some cases this can ensure that the gains remain within the annual allowance and prevent incurring (or at least reducing) a CGT bill.
Capital gains tax losses
If you generate a profit from the sale of one item, but incur a loss from the sale of another, you have the option to deduct the loss from the gain when calculating your CGT liability.
Any losses that have not been used to offset gains can be carried forward indefinitely, as long as the loss is claimed within four years from the end of the tax year in which the disposal occurred.
For HMRC purposes it is crucial to submit details of CGT losses in your tax return even if you do not owe any capital gains tax.
