The Ultimate Guide to the Capital Gains Tax

If the mere mention of ‘capital gains tax’ makes you want to crawl into a hole and hibernate until tax season is over, fear not! As Independent Financial Advisors, we’ve created this ultimate guide to help you navigate the murky waters of Capital Gains Tax with ease and confidence.

What Is Capital Gains Tax? (CGT)

When you sell an asset for more than you paid for it, the difference between the sale price and the purchase price is known as a capital gain. Capital gains tax is the tax that you pay on that gain.

For instance, let’s say you bought a house or a piece of land for £100,000, and then you sell it for £150,000. The difference of £50,000 is your capital gain, and you may have to pay tax on that amount.

This type of tax doesn’t apply to unsold investments. Stock shares will not incur taxes until they are sold, no matter how long the shares are held or how much they increase in value.

How Much Capital Gains Tax Will You Have to Pay?

Rates and rules can also vary by country, and also depends on:

• the type of asset being sold
• The profit or gain made
• Your individual tax band
• The current tax-free allowance

In the UK, you only have to pay Capital Gains Tax on your overall gains above your tax-free allowance (called the Annual Exempt Amount).

The Capital Gains tax-free allowance for this year is:

• £6,000
• £3,000 for trusts

From the 2024/25 tax year this value will fall to £3,000. You can get more info on the upcoming change on the government website.

How Capital Gain Tax Can Impact Your Investments?

When engaging in stock trading in the UK, it may be necessary to pay capital gains tax (CGT). If the amount of profit earned from the sale of shares or investments exceeds £12,300, CGT will be owed on the excess amount.

For individuals classified as higher or additional rate taxpayers, the CGT rate for gains from residential property is 28%, while the rate for gains from other chargeable assets is 20%.

If an individual is classified as a basic rate taxpayer, the CGT rate for profits over £12,300 is 10%. If the profits push the individual into the next tax bracket, they will owe CGT at the rates of 28% for gains from residential property and 20% for gains from other chargeable assets on the amount exceeding the basic tax bracket.

Assets you may need to pay CGT on:

The following assets may require CGT to be paid upon selling:

• most personal possessions worth £6,000 or more, apart from your car
• property that’s not your main home
• your main home if you’ve let it out, used it for business or it’s very large
• any shares that are not in an ISA or PEP
• business assets

You do not need to pay CGT if:

• The profit you make comes from a stocks and shares ISA
• Gains from ISAs or PEPs, UK government gilts, premium bonds, or betting, lottery or pool winnings

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Working With a Financial Life Planner to Navigate CGT

With so many rules and individual variables that can impact this type of tax, navigating the world of CGT can often feel like navigating a minefield. For that reason, it’s always a good idea to consult with a tax professional or financial advisor to understand how capital gains tax applies to your specific situation.

Hansford Bell’s Financial Planning Service is an excellent option for individuals seeking to gain knowledge about how Capital Gains Tax can impact their investments. Our team of expert financial planners provides personalised advice and strategies to help clients navigate the complexities of CGT, ensuring they can make informed decisions regarding their investments.

With a focus on building long-term relationships, Hansford Bell’s Financial Planning Service takes the time to understand our client’s unique financial goals, needs, and aspirations for the future, providing tailored solutions that align with their individual circumstances.

By working with us, you can gain peace of mind and confidence in your investment decisions, safe in the knowledge that you have a team of knowledgeable experts on your side.

Your financial goals, our expertise. Hansford Bell’s got you covered. Pop us a message to book a free initial consultation.

Note: This blog is for general information only and does not constitute advice.

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