What is capital gains tax and how to reduce your bill

Capital gains tax (CGT) is in the spotlight amid concerns about what a future Labour government would do with the charge.

Labour leader Keir Starmer may have “explicitly” ruled out raising income tax, VAT, corporation tax and national insurance, said the MailOnline, if he – as expected – becomes prime minister after the general election on 4 July.

But there is less certainty over CGT, added the news website, “sparking concerns” from City figures. 

Labour Party figures have “declined repeatedly” to rule out CGT rises, said the Financial Times, and there are worries that a rise could “deter investors from the UK and push entrepreneurs to sell businesses”.

We explain the tax that everyone is suddenly talking about.

What is capital gains tax?

CGT is a tax paid when you “sell, give away, exchange or otherwise dispose of a capital asset”, explained the Low Incomes Tax Reform Group (LITRF).

It is payable on profits made from selling certain assets such as shares outside an ISA, a business or a second property.

The tax isn’t charged on what you receive for the asset but “the gain you make” when it is sold.

Business owners, investors and landlords paid record amounts of CGT in the 2021-to-2022 tax year, with 394,000 taxpayers paying £16.7 billion.

The tax was paid on £92.4 billion of gains and both the total CGT liability and the amount of gains increased by 15% annually, said HMRC, while the number of people paying the tax has increased by 20%.

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The intake is “comparatively small fry compared with other big hitters” such as income tax and National Insurance, said The Times. But it has become a “revenue-raising target for political parties setting out their stall for government”.

How capital gains tax works

CGT rates are different from income tax rates.

You will need to know your overall income for the relevant tax year, explained AJ Bell, and “it also depends on the type of investment you’ve sold”.

Currently, a basic rate taxpayer pays 18% on additional residential property gains and 10% on other assets such as shares or a business sale.

Higher or additional rate taxpayers pay 28% on additional residential property and 20% on other assets.

The tax isn’t automatically deducted by HMRC, explained Unbiased, so you will need to report it.

This can be done through a tax return or the government’s ‘real-time’ CGT service and “you’ll be pleased to know”, added Unbiased, that you have a CGT allowance. This is the amount of profit you can make before CGT is charged. It is currently £3,000, having halved from the previous tax year, and was £12,300 before that.

Residential property gains must be reported to HMRC within 60 days of a sale and you have until 31 December of the same year to disclose investment gains.

What do the general election manifestos say about capital gains tax?

The Conservatives have pledged not to raise CGT and the party manifesto even promises 100% relief on the tax for landlords who sell their homes to current tenants.

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The Liberal Democrats and the Green Party have pledged to “increase the capital gains rate to more closely match the higher rates for income tax on earnings”, said TaxWatch.

But Labour’s manifesto doesn’t explicitly mention CGT, while stating that it will “not raise taxes on working people”. This leaves the door open for “some form of tax hike on wealth”, said Investors’ Chronicle, and CGT is an “obvious target”.

How to reduce your capital gains tax bill

Make sure you use your CGT allowance as it “can’t be rolled over”, said Unbiased, “so it really is a case of using it or losing it”.

HMRC provides “generous allowances” for married couples for jointly owned assets, said MoneyWeek. Assets can be passed on to a spouse tax-free, which is useful “if one partner is in a lower tax band”.

Plus you could split assets with your husband, wife or civil partner to “effectively double your allowance and boost how much profit you can take tax-free”.

It is possible to offset losses from other assets against your CGT bill, added AJ Bell, but you must register the losses within four years after the end of the tax year that the relevant sale was made.

As well as using past losses, said interactive investor, keep track of costs of the asset, such as maintaining a property, as “this will reduce the size of your gains and subsequently the amount of tax you need to pay”.

Contributing more to your pension could even reduce your income for tax purposes, the investment platform added, and don’t forget to make use of your ISA allowance as “there will be no income or capital gains tax to pay” on your returns.

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