What Is Capital Gains Tax and Who Has to Pay It?
Capital Gains Tax (CGT) is often misunderstood, yet it can have a significant impact on your personal or business finances. Unlike Income Tax, it doesn’t apply to regular earnings, instead, it’s charged when you make a profit from selling or disposing of certain assets. Understanding when it applies and how to plan ahead can help you avoid unexpected tax bills and make smarter financial decisions.
What is Capital Gains Tax?
Capital Gains Tax is a tax on the gain you make when you dispose of an asset that has increased in value. The gain is the difference between what you paid for the asset and what you received when you sold or disposed of it, not the total sale price.
In the UK, CGT commonly applies to assets such as property that is not your main home, shares and investments, business assets, and valuable personal possessions above a certain value. Some assets are exempt, including your main residence (in most cases), ISAs, and certain government bonds.
Everyone has an annual CGT allowance, meaning you can make gains up to a set amount each tax year before any tax becomes payable. If your total gains exceed this allowance, CGT may be due, and the rate you pay depends on both the type of asset and your overall taxable income. The rules and thresholds are set and administered by HM Revenue & Customs.
When does Capital Gains Tax apply?
CGT applies when you dispose of an asset. Disposal doesn’t only mean selling, it can also include gifting an asset (other than to a spouse or civil partner), exchanging it, or receiving compensation for it.
It commonly applies to individuals who:
- Sell a property that is not their main residence, such as a buy-to-let or second home
- Sell shares or investments that are not held within an ISA or pension
- Sell or dispose of business assets, including part or all of a business
- Gift assets to someone other than a spouse or civil partner
- Sell high-value personal possessions, such as artwork or jewellery
For residential property, CGT often needs to be reported and paid within a short timeframe after completion, making forward planning particularly important. Losses can usually be offset against gains, which may reduce the amount of tax payable, provided accurate records are kept.
How to plan ahead for Capital Gains Tax
Capital Gains Tax is one of the more manageable taxes with the right preparation. Timing disposals carefully can allow you to make full use of annual allowances, potentially spreading gains across multiple tax years.
Using tax-efficient wrappers such as ISAs or pensions can prevent future gains from being taxable altogether. Married couples and civil partners may also reduce their CGT exposure by transferring assets between each other to use both allowances.
For business owners, additional reliefs may be available when selling or restructuring a business, but these come with strict conditions. Planning early, ideally before a sale is agreed, is essential.
Final thoughts
Capital Gains Tax doesn’t only affect wealthy investors. Anyone selling assets at a profit could be impacted. With a clear understanding of when CGT applies and proactive planning, you can stay compliant with UK tax law while keeping more of your gains.
