Capital Gains Tax (CGT) – a guide for investors (8 Feb 2024)

Any profit you make from selling an asset could be subject to capital gains tax (CGT). This could be as much as 28%, so it’s important you are aware of how CGT could affect you and factor it into your calculations when making investment decisions.

When is capital gains tax applied?

Capital gains tax is applied to any profit arising when you sell or dispose of almost any asset that is worth in excess of the current annual CGT allowance of £6,000. There are a few exemptions such as when you sell your car for less than £6,000, or gift an asset to your spouse or civil partner. In addition, there are several tax-free vehicles you can hold assets in, such as ISAs, pensions and offshore bonds, where CGT is not applied. Using a diverse range of CGT-free tax wrappers effectively is key if you might be affected by CGT. Offshore bonds will however be subject to a chargeable gain when surrendered so, in a sense, these are tax deferred rather than tax exempt products.

How much is UK capital gains tax for the 2023/24 tax year?

Basic rate taxpayers will have to pay 10% in capital gains tax for any gains that they realise and higher rate taxpayers are required to pay 20%.

So, if you purchase shares in a general investment account for £15,000 and sell them for £30,000, you will have made a gain of £15,000. If you are a basic rate taxpayer, £1,500 will be levied in CGT and £3,000 will be applied for a higher rate taxpayer.

What is the annual capital gains tax allowance 2023/2024?

Luckily, there is a helpful ‘annual allowance’ provided by the UK government. Any individual can make up to £6,000 in realised gains in a single tax year. As long as no gains were made elsewhere, the £15,000 gain in the previous example could therefore be reduced to £9,000, and thus £900 and £1,800 in CGT would be levied for basic rate and higher taxpayers respectively.

How to reduce the capital gains tax you pay

Using your annual CGT allowance effectively, can be a key component of financial planning. If you have investments held within a taxable account, an adviser / Investment Manager will look to make disposals on an annual basis to make use of your available annual allowance and continually reduce the gains within your portfolio. They typically subscribe the sale proceeds to an ISA or re-invest them into a very similar investment fund. They can only reinvest in the original investments after 30 days have passed.

How to avoid the 60% tax trap and more…

Did you know that people earning over £100,000 can pay an effective tax rate of 60%?

How much capital gains tax do you pay on property?

One asset where it’s more challenging to make use of your annual CGT allowance is property. Unfortunately, you can’t sell portions of a property in the same way you can an investment portfolio, so gains can build up on buy-to-lets. Fortunately, CGT is not applied to your primary residence but there is an additional 8% rate applied to any other properties you own. This means 18% and 28% is levied for basic rate and higher rate taxpayers respectively when they sell a second property. This is a significant sum and there is little you can do to avoid it, which can often make more traditional investing methods a more attractive option.

One of the few ways you can avoid paying CGT on a second home, or in fact on any asset, is by offsetting losses made on other disposals against the gain you have realised. This doesn’t have to be in the same tax year either, as losses can be carried forward for up to four years from the point at which you made the disposal that created that loss.

Capital gains tax can have a significant impact on your potential profits, so having a clear understanding of how and when it is applied is key to effective financial planning. It’s also important to ensure you are active in managing it, particularly when considering your investments. Managing CGT effectively can be reasonably complex so, as always, do take advice if it’s an area that is significantly impacting you.

This article is based on our understanding of current legislation and taxation which can change at any time in the future. Blackadders Wealth Management LLP are Independent Financial Advisers and a Discretionary Investment Management Firm, authorised and regulated by the Financial Conduct Authority under FCA number 738512. The FCA does not regulate tax advice.