What is Capital Gains Tax?

Understanding and complying with Capital Gains Tax (CGT) is crucial for effective financial planning and legal compliance, helping you to avoid penalties, interest charges, and financial losses.

To ensure you maximise your assets, we’ve compiled a complete capital gains tax checklist to help you approach the process of registering and paying more confidently.

Contact Mollan today for a detailed consultation with no fees or obligations.

What is Capital Gains Tax (CGT)?

When you sell or dispose of an asset that has increased in value, you usually pay capital gains tax. It’s crucial to conduct accurate tax calculations on such assets to avoid liabilities and maximise tax reliefs and exemptions. Effective tax planning is essential in this area.

For example, if you bought a house 20 years ago and sold it today for a profit of £100,000, you may be liable for tax on the gain, not the asset itself.

Further details on accurate calculations are provided in the guide.

Capital Gains Tax usually applies to the following assets:

Residential property (second homes, rental properties)
Commercial property
Land
Stocks, bonds and mutual funds
Exchange-traded funds (ETFs)
Company shares
Commercial property (business premises)
Personal possessions (jewellery, antiques, cars etc)
Investment funds (Trusts, offshore funds)
Cryptocurrencies (Bitcoin, Ethereum etc)
Intellectual property (Patents, trademarks, copyrights)
Assets in Trusts

Exempt assets usually include:

Primary residence (due to Private Residence Relief)
Personal car
Cash (not invested)
Lottery and betting winnings
ISAs
UK Government bonds
Foreign currency held for personal use
Compensation for personal injury

Special considerations for capital gains tax include:

Gifts: Transfer of assets between spouses and civil partners are generally exempt from CGT)
Inheritance: inherited assets are valued at the date of death, and any CGT is based on the new value when the assets is sold by the beneficiary.

What is the Capital Gains Tax rate?

There are two Capital Gains Tax rates:

Basic rate: Tax payers generally pay 10% on assets in general and 18% on residential property.
Higher/additional rate taxpayers: High tier taxpayers pay 20% on most assets and 24% on residential property.

	Basic	Higher
General Assets	10%	20%
Residential property	18%	24%

Until 2024, the higher tax rate for residential property was 28%, but it has since been reduced to 24%. This is a good example of taxation adjustments that take place regularly, and it is important to be aware of them.

Note: If you have “carried interest” from an investment fund, the rate is 28%. In all cases, you can subtract a Capital Gains Tax allowance from your total tax liability.

What is a Capital Gains Tax allowance?

The Capital Gains Tax allowance exempts a certain amount of profit from CGT when you sell that asset. The allowance varies by tax year, so it’s important to stay informed about changes.

Below are the current annual allowances, as updated by Gov.uk:

Tax year	Individuals, personal representatives & trustees for disabled people	Trustees
2024/2025	£3,000	£1,500
2023/2024	£6,000	£3,000
2022/2023	£12,300	£6,150
2021/2022	£12,300	£6,150
2020/ 2021	£12,300	£6,150
2019/ 2020	£12,000	£6,000

Stay up to date with Capital Gains Tax allowance rates through Gov.uk.

How to calculate your CGT

When calculating your CGT liability, follow these steps. We’re using the example of selling a home and earning £100,000 of CGT:

Establish the gain. In this case work out the sale price minus the purchase price. You can also remove any allowable expenses such as selling costs and money you spent on the asset that added value.
Subtract the CGT allowance: For individuals, the tax-free allowance is £3,000, depending on the tax year.
Determine the taxable gain: Subtract the allowance from the gain (£100,000 – £3,000 = £97,000). The taxable gain is £97,000.
Apply the correct rate: Since this example involves a residential property, the applicable tax rate is either 18% or 28%. The taxable gain in this case falls into the higher tier as it exceeds £50,270. So, we work out 28% of the taxable gain of £97,000. This equals £27,160.

What if you make a loss?

If you incur a loss, subtract it from gains made in the same tax year. If the resulting gain exceeds the allowance, you can offset unused losses from previous years. Any remaining losses can be carried forward for future use.

When Do You Not Pay Capital Gains Tax?

There are exemptions from CGT in certain circumstances, including:

1. Private Residence Relief (PRR): The 36-month rule

Private Residence Relief (PRR) may apply if you lived in a residential property as your main home before selling, a rule allowing homeowners to exclude a portion of their Capital Gains when selling their primary residence.

Circumstances include:

The final 9 months: This period of time always qualifies homeowners for PRR, regardless of how the property was used.
Moving within the UK: If the owner is absent from their main residence due to reasons such as moving abroad or into a care home, the 36-month rule can extend to the final 36 months of ownership. In some cases, this period can be extended to 4 years due to employment-related moves within the UK.

2. Business Asset Disposal Relief

Business Asset Disposal Relief applies if you’re disposing of business assets up to a lifetime limit of £1 million, offering a 10% relief on gains is applicable.

3. Rollover Relief

Rollover Relief allows you to defer the Capital Gains Tax on any gains made from selling a business asset until you reinvest the proceeds in a new business asset.

4. Incorporation Relief

Incorporation Relief allows you to defer Capital Gains Tax on gains when transforming a business into a company, as long as you receive shares in exchange.

5. Gift Relief

Gift Relief allows you to delay Capital Gains Tax obligations when giving away or selling an asset below its market value. give away an asset, or sell it under its market value, you can delay the CGT obligation. Instead, the recipient may be liable for CGT instead.

6. Relief for Spouses and Civil Partners

Transfers of assets between spouses or civil partners are typically exempt from Capital Gains Tax.

7. Employee Share Schemes

Certain share schemes, like employee share schemes, are exempt from Capital Gains Tax obligations.

Streamline CGT reporting with Expert Accounting

Understanding your CGT obligations and how to report gains is crucial for maximising returns on your assets while navigating regulatory requirements smoothly.

A diligent and knowledgeable approach is a good start, but the best way to ensure that no stone is unturned is to work with expert accountants, who specialise in financial matters. Including comprehensive and compliant CGT reporting.

Contact Mollan & Co today for a free, zero-obligation consultation.

Author Profile

Rob Mollan

Owner and Managing Director at Mollan & Co

I'm the owner and Managing Director of Mollan & Co Accountants. I'm a skilled and efficient accountant with more than 20 years of experience in the industry.

I developed valuable skills in commercialisation through my work in the science and technology department at the Scottish University. Then, in 2002, I formed my own internet-based marketing company, producing and distributing 360° virtual reality tours for the Scottish tourism sector.

I now use my commercial skills, expert tax knowledge and first-hand experience to help other businesses grow and flourish through strong accounting practice.

Our success at Mollan & Co is directly related to the success of our clients.