Navigating Capital Gains Tax – What do you need to know?

When it comes to managing finances, whether personal or business-related, understanding the complexities of taxation is a must.

Capital Gains Tax (CGT) is one of the key taxes that both individuals and businesses of all sizes must deal with.

Knowing how CGT impacts you or your business can help in making informed investment decisions, planning for succession and preparing for later life.

Tax rates for capital gains

What dictates the rates?

The rates for CGT vary based on two main factors, your Income Tax bracket and the type of asset you are selling.

It is crucial to be aware of these factors in order to plan effectively.

Rates for different taxpayers

Basic rate taxpayers

If you fall within the basic tax rate bracket, the rate of Capital Gains Tax you will be liable for is influenced by the size of your gain, your taxable income and the nature of the asset, whether it is residential property or other types of assets.

Should the total amount lie within the basic Income Tax threshold, your capital gains will be taxed at 10 per cent or 18 per cent if the gain is from residential property.

For any amount that exceeds the basic tax rate, the tax will be 20 per cent or 28 per cent if it is residential property.

Higher and additional rate taxpayers

These taxpayers must pay 20 per cent on assets and 28 per cent on residential property.

Private Residence Relief

It is worth noting that the sale of your main home will usually not be subject to CGT, due to the Private Residence Relief.

This is a significant relief and it’s essential to know if you qualify.

The importance of knowing your tax bracket

Understanding which tax bracket you fall under is a crucial aspect of financial planning.

It affects not just the amount you owe in Income Tax, but also your CGT liability.

Reducing your Capital Gains Tax liability

Reducing your CGT isn’t just about savvy investing, it is also about making the most of allowances and reliefs available to you.

• Utilising your Annual Exemption Allowance – Each financial year, individuals have an annual exemption allowance that they can use to reduce their CGT liability. The current Annual Exemption Allowance threshold is £6,000 or £3,000 for trusts (as of October 2023).
• Transferring assets to a spouse or civil partner – If you have utilised your Annual Exemption Allowance, consider transferring assets to a spouse or civil partner to make use of their allowance as well.
• Offsetting capital losses against gains – If you have made a capital loss in the same year, you can offset this against your gains to reduce your CGT liability.
• Business Asset Disposal Relief – For businesses, particularly small and medium-sized enterprises (SMEs), there is an additional allowance called Business Asset Disposal Relief (formally known as Entrepreneurs’ Relief). This can significantly lower the amount of CGT due on the sale of business assets.

Understanding the nuances of Capital Gains Tax is crucial for individuals and businesses alike.

It is not just about knowing what you owe but also about understanding what allowances are available for you.

As always, consider consulting an accountant for tailored advice that suits your specific circumstances.

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