{"id":1115,"date":"2024-03-21T14:00:00","date_gmt":"2024-03-21T14:00:00","guid":{"rendered":"https:\/\/ctt-group.co.uk\/tax-trust\/?p=1115"},"modified":"2024-03-05T12:40:36","modified_gmt":"2024-03-05T12:40:36","slug":"a-guide-to-capital-gains-tax","status":"publish","type":"post","link":"https:\/\/ctt-group.co.uk\/tax-trust\/a-guide-to-capital-gains-tax\/","title":{"rendered":"A Guide to Capital Gains Tax"},"content":{"rendered":"
\n\t\t
\n\t\t\t

As the end of the 2023\/24 tax year approaches, it’s crucial to be mindful of changes to Capital Gains Tax (CGT) exemptions. Previously set at \u00a36,000, the tax-free allowance for capital gains is now decreasing significantly to \u00a33,000 for the upcoming 2024\/25 tax year.<\/p>\n

CGT is a vital aspect of financial planning and wealth management in the UK. For professional advisers, understanding the intricacies of CGT is essential for providing comprehensive guidance to clients. In this guide, we’ll delve into the fundamentals of CGT, explore key considerations for minimising tax liabilities, and provide actionable insights to help navigate the complexities of CGT in the UK.<\/p>\n

Understanding Capital Gains Tax:<\/strong><\/h4>\n

CGT is a tax on the profit made from selling or disposing of assets that have increased in value. These assets can include property (excluding main residences), stocks, bonds, precious metals, and certain personal possessions. The tax is levied on the gain realised, not the total sale proceeds.<\/p>\n

The tax rates on capital gains vary depending on the individual’s total taxable income and the type of asset sold. As of the 2023\/24 tax year, the standard rates are 10% for basic rate taxpayers and 20% for higher and additional rate taxpayers. However, different rates may apply to gains on residential property and carried interest.<\/p>\n

The capital gain is calculated by subtracting the cost of acquiring the asset (purchase price) from the proceeds received from its sale. Allowable deductions, such as transaction costs and enhancement expenditures, can be deducted from the gain to arrive at the taxable capital gain.<\/p>\n

Working out Capital Gain<\/strong><\/h5>\n

Let’s say Ms Sharma, a UK resident and higher-rate taxpayer, purchased an investment property ten years ago for \u00a3200,000. Now, she’s decided to sell the property for \u00a3400,000, realising a substantial capital gain of \u00a3200,000 (Capital Gain = Proceeds – Cost of Acquisition<\/strong>). However, Ms Sharma has incurred costs of buying, renovating and selling the property, which are allowable deductions: \u00a33,000 solicitor’s fees, \u00a35,000 estate agent’s fees, \u00a310,000 Stamp Duty Land Tax, and \u00a315,000 in home improvements (\u00a333,000 total deductions). Therefore, Ms Sharma’s adjusted capital gain is \u00a3200,000 – \u00a333,000 = \u00a3167,000 (Adjusted Capital Gain = Cost of Acquisition – Allowable Deductions<\/strong>).<\/p>\n

Working out CGT liability<\/strong><\/h5>\n

As Ms Sharma is subject to the higher-rate of 20% for residential property gains, her CGT liability is calculated as follows:<\/p>\n

CGT = Adjusted Capital Gain x Tax Rate<\/strong><\/p>\n

\u00a3167,000 x 0.20 = \u00a333,400<\/p>\n

Thus, when selling her investment property for \u00a3400,000, Ms Sharma will have to pay \u00a333,400 in CGT.<\/p>\n

Allowances:<\/strong><\/h4>\n

In the UK, individuals are entitled to an annual tax-free allowance, known as the Annual Exempt Amount (AEA), which exempts a certain amount of capital gains from tax each tax year. For the 2023\/24 tax year, the Annual Exempt Amount is \u00a312,300 for individuals and \u00a36,150 for trustees.<\/p>\n

So, following the previous example of Ms Sharma’s investment property sale, the Annual Exempt Amount will reduce her CGT liability. For the 2023\/24 tax year, the AEA for individuals is \u00a36,000. Therefore, Ms Sharma can offset this amount against her capital gains before applying the applicable tax rates.<\/p>\n

Let’s revisit Ms Sharma’s case:<\/p>\n

Adjusted Capital Gain (after allowable deductions): \u00a3167,000<\/p>\n

If we deduce the AEA from Ms Sharma’s adjusted capital gain:<\/p>\n

\u00a3167,000 – \u00a36,000 = \u00a3161,000<\/p>\n

This means that Ms Sharma’s taxable capital gain after applying the Annual Exempt Amount is \u00a3161,000.<\/p>\n

Now, let’s calculate the Capital Gains Tax liability on this reduced taxable gain: \u00a3161,000 x 0.20 = \u00a332,200 (CGT = Tax Rate x Taxable Gain<\/strong>).<\/p>\n

Therefore, with the Annual Exempt Amount taken into account, Ms Sharma’s Capital Gains Tax liability would be \u00a332,200.<\/p>\n

Mitigating Capital Gains Tax Liabilities:<\/strong><\/h4>\n

There are several strategies you can employ to help clients mitigate CGT liabilities:<\/p>\n

Utilising tax-efficient investment wrappers<\/strong><\/h5>\n