Understanding Capital Gains Tax

21st August 2023

If you’re an investor, understanding capital gains tax is crucial for your financial planning. Capital gains tax is the tax you pay on the profit you make from selling an asset. In other words, it’s the tax you pay on the difference between the price you paid for an asset and the price you sold it for. However, calculating capital gains tax can be complex, and it’s important to understand the rules surrounding it. Here we will discuss capital gains tax in detail and provide some tips on how to minimise its impact on your finances.

The Spring Budget 2023 introduced significant changes to Capital Gains Tax (CGT). While the Government decreased the CGT allowance from £12,300 to £6,000, with another reduction planned for 2024, they made positive adjustments to CGT for individuals going through separation and divorce.

How is Capital Gains Tax calculated?

CGT is calculated based on the net capital gain of an individual or entity. The net capital gain is calculated by deducting the cost base of the asset from the capital proceeds received from the sale of the asset. This net capital gain is then added to the individual’s taxable income, and the tax rate is calculated accordingly.  This applies to personal possessions, shares or investments, UK property and business assets you have disposed of in the tax year.

What are the exemptions for Capital Gains Tax?

There are some exemptions for CGT that you should be aware of.  For instance, if you sell your primary residence, you may be eligible for the primary residence exemption. This exemption allows you to avoid paying CGT on the profit you make from selling your home.

Additionally, if you hold a business asset for more than 24 months before selling it, you may be eligible for a 50% discount on CGT using business asset relief. This means that you only pay tax on 50% of the capital gain, effectively reducing your tax liability.

How can you minimise Capital Gains Tax?

If you’re looking to minimise the impact of CGT on your finances, one strategy is to hold business assets for longer periods of time. As mentioned earlier, if you hold a business asset for more than 24 months before selling it, you may be eligible for the 50% discount on CGT.

Another approach is to offset your capital gains with capital losses. If you have investments that have decreased in value, you can sell them to offset the capital gains from your profitable investments.

What are the consequences of not paying Capital Gains Tax?

If you don’t report disposals and pay CGT, you may face penalties and interest charges from the government.

CGT is an important aspect of financial planning for anyone who invests in assets. Understanding how CGT is calculated, the exemptions, and how to minimise its impact can help you make better investment decisions. If you’re still unsure about how CGT might affect you, get in touch, we can help you navigate the complexities of tax law.