Capital Gains Tax (CGT) is often a misunderstood topic. It is an important tax to be aware of, as it affects both individuals and businesses and some common types of transaction. We’ll delve into the history of CGT in the UK, explain when HMRC collects CGT, and provide an overview of the rules and regulations which govern it. By the end, you’ll have a better understanding of how CGT works and how it affects you.
A quick history of Capital Gains Tax
Capital Gains Tax (CGT) is a tax when you sell (or dispose) of an asset that has increased in value. It is the gain that is taxable rather than the total amount of money received. You may be asking yourself, why was the capital gains tax introduced? Doesn’t the government want us to invest and foster growth in the economy? Therefore, aren’t we within our rights to want to be rewarded handsomely for our risk taking instead of punished by forgoing some of the winnings?
The tax was first introduced in 1965 in the United Kingdom by the incoming Labour government as concerns about the need for a tax on capital gains started to emerge during the Second World War. As a result of the war, capital assets, such as ships and land, were increasing in value, and there were debates about whether to extend the definition of income to include capital assets or, from the perspective of taxation, to consider the two matters as separate.
Boiled down to its most basic concept, the view was that the mere fact of realising a net gain would be enough to create liability. The reasoning behind it was because the capital gain increases a person’s purchasing and spending power.
Additionally, capital gains are not distributed equally amongst different members of the taxpaying community; instead they are disproportionately concentrated in the hands of property owners and equity holders. If not taxed accordingly, this could become a vehicle for people to accrue money while escaping income tax.
This is precisely what James Callaghan said about the introduction of Capital Gains Tax in his 1965 budget speech, “…capital gains confer much the same kind of benefit on the recipient as taxed earnings more hardly won. Yet earnings pay tax in full while capital gains go free… This new tax will provide a background of equity and fair play.”(1)
In the years following that speech and the introduction of CGT, the tax code has been adjusted, extended and moulded to what it is today. Below we go over some of the rules you need to be aware of to ensure that you are filing your capital gains taxes correctly.
When do I pay Capital Gains Tax?
For example, if you bought a piece of artwork for £5,000 and sold it later for £25,000 you will have made a gain of £20,000.
The most common occurrences where CGT is payable can be found in the list below:
- Personal possessions sold for £6,000 or more (apart from your car). Typical examples include jewellery, paintings, antiques, coins and stamps.
- Property (that is not your main home). Most commonly on buy-to-let properties, but also on business premises, land, and inherited property.
- Shares that are not in an Individual Savings Account (ISA) or a Personal Equity Plan (PEP).
- Business assets including buildings, fixtures and fittings, plant and machinery, shares, trademarks.
What is the Capital Gains Allowance?
There is a tax-free allowance on your overall gains called the Annual Exempt Amount, which is currently £12,300 for the 2022/23 tax year. However, it was announced in the Autumn Finance Bill 2022 that the allowance will reduce significantly to £6,000 in April 2023 and a further reduction to £3,000 in April 2024. The rates however, will remain the same.
Capital Gains Rates
The amount or rate at which you pay CGT depends on your taxable income. This is calculated once your gain (less annual exempt amount) has been added to your other taxable income.
For anyone with total taxable income within the basic rate band you’ll pay 10% on gains and 18% on residential property.
For higher and additional rate taxpayers you’ll pay 20% on gains and 28% on residential property.
Whilst the above covers the majority of cases for CGT please note that it’s not an exhaustive breakdown and there are exceptions and variations to some of the points stated above. This is worth noting particularly in instances where you gift assets to a spouse or civil partner or to charity. Likewise, if you have overseas assets or if you are non-resident in the UK for tax purposes. In these examples you should look to find the specific guidance or seek specialist advice.
(1). Baker, P., Bowler-Smith, M. (2017) ‘Chapter 11: The United Kingdom’, in Littlewood, M., Elliffe, C., Capital Gains Taxation, A Comparative Analysis of Key Issues. Cheltenham: Edward Elgar Publishing, pg.335-362