Understanding Capital Gains Tax – What do you need to know

Capital Gains Tax (CGT) plays a significant role in the UK tax landscape, impacting a diverse range of taxpayers beyond just high-net-worth individuals and seasoned investors.

Understanding its applicability and influence on individual tax liabilities is essential for anyone who owns assets, contemplates investing or seeks to navigate their tax obligations effectively.

What is Capital Gains Tax?

CGT is a tax on the profit (or gain) you make when you sell, give away or otherwise dispose of an asset that has increased in value.

It is not a tax on your total income, nor is it a tax on the asset’s total value, rather, it is a tax solely on the gain you have made from owning that asset.

Assets can include things like property, shares or collectables like art, jewellery or antiques.

When does Capital Gains Tax apply?

CGT comes into play in several scenarios, including but not limited to:

• Selling property – If you sell a second home or rental property and make a profit, that profit may be subject to CGT. Your main residence is usually exempt under the Principal Private Residence (PPR) relief.
• Selling shares – If you sell shares and make a profit, you may have to pay CGT on the gains. However, certain types of shares like those in an ISA or a pension are exempt.
• Inheritance – Though there is no CGT due immediately upon inheriting an asset, if you later sell this asset and it has gained in value since the time of inheritance, CGT could apply.
• Gifts – If you give away an asset to someone other than your spouse or civil partner, you might have to pay CGT on the gain, even if no money has exchanged hands.
• Selling personal belongings – If you sell personal items for £6,000 or more (apart from your car) and they have increased in value, then you may be liable for CGT on any gains.
• Business assets – If you sell or dispose of assets related to a business you own, then you may be liable for CGT on any gains.

How CGT relates to your personal tax liabilities

CGT becomes part of your overall tax picture. It may affect your tax bracket and could potentially push you into a higher tax rate, depending on the size of the gain.

It is also important to consider how it interacts with other taxes, such as Income Tax and Inheritance Tax, when planning your finances.

Understanding Capital Gains Tax can seem complex, but it is essential for anyone who owns assets that may increase in value.

Being aware of when CGT applies and how it fits into your broader financial landscape can help you make more informed decisions and potentially save money.

If you need advice on CGT, don’t hesitate to get in touch with our team today.