What Is Capital Gains Tax And How Does It Work

What Is Capital Gains Tax And How Does It Work

So many people are making investments nowadays, and there is no surprise since many people are making a lot of money from them. Whether it is on a property or stocks and shares, you can end up selling your asset for a lot more than you sold it for. However, there is a downside to this as you will most likely have to end up paying Capital Gains Tax on this profit.

There are a lot of factors when it comes to determining whether you pay Capital Gains Tax on a sold investment and how much you will have to pay. It can seem daunting at first but don’t worry, as we have put together an extensive guide on these types of taxes. 

Continue reading to find out what you may have to pay out, the rates you pay, and how you can reduce them.


What is Capital Gains Tax?

Making an investment can be one of the greatest decisions of your life, especially when you sell it for more than you paid for it. However, a levy comes with selling a successful investment, and this is known as Capital Gains Tax. You will pay out this levy only on the tax year that you sell the investments, and the rates can vary. 


How does Capital Gains Tax work?

There are a few technical terms when it comes to Capital Gains Tax, and they explain how the entire process works. For example, when you first sell off an investment asset, your capital gains are then ‘realised’. This only happens when you sell the asset, and it is unrealised when you still have the investment in your possession. You won’t incur taxes on your investment until the moment it is sold. 

According to gov.uk, you only pay Capital Gains Tax when you sell one of these investments, also known as chargeable assets:

  • Any personal possessions that cost over £6,000, but not your car
  • A property you don’t use as your main residence
  • Your main residence if it has been let out, used for business, or if it is large
  • Shares that aren’t in an ISA or PEP
  • Any assets associated with a business

In some cases, you may have to pay Capital Gains Tax on cryptocurrency and other digital assets, but not all the time. You may have to consult an accountant to find out if your asset will make you pay tax if you sell it. 

If you purchase an investment with someone and own only part of the asset, you will still need to pay Capital Gains Tax. However, you don’t have to pay the whole amount, only the percentage of your share of the gain. 


What tax rates are there on capital gains?

Like with many other taxes, you will receive an annual tax-free allowance that will also apply to your Capital Gains. You will only pay Capital Gains Tax if your overall gains exceed the annual exempt amount threshold. 

The annual exempt amount that you can use against your capital gains changes each year, but for 2021 to 2022, it was £12,300 for individuals, personal representatives, and trustees for disabled people. If you’re any other form of trustee, the annual exempt amount is lower and only £6,150 for the past tax year. 

After you know whether you’re exempt, you’ll have to find out what tax rates apply to your capital gains. The rate you use will depend on your annual taxable income, so you’ll need to calculate that first. 

The Capital Gains Tax rates were updated on 6 April 2017, and since then, the rates apply for the following:

  • 10% and 20% for individuals
  • 18% and 28% for individuals with residential property and carried interest
  • 20% for trustees or personal representatives for people that have died (doesn’t include residential property)
  • 28% for trustees or personal representatives for people who have died (with residential property)
  • 10% for any gains that qualify for the Business Asset Disposal Relief
  • 28% on property that has the Annual Tax on Enveloped Dwellings paid off
  • 20% for companies


How do you calculate Capital Gains Tax?

If you want to figure out how much tax you’ll be charged, you must first figure out what your total capital gains will be. It is super easy to figure out, as it is the difference between what you paid for your investment and what you sold it for. You only have capital gains if you sell your asset for more than you paid for it, and if you make less, then you actually have capital losses instead. 

Once you have your total capital gains for your investment, then you can figure out how much you’ll be paying out by selecting the Capital Gains Tax rate that applies to you. For example, if your capital gains are £100,000 and your tax rate is 10%, then your Capital Gains Tax will be £10,000. 


How and when to pay Capital Gains Tax

You won’t be given a specific invoice that states you have to pay your Capital Gains Tax. Instead, you need to figure out if your total gains are above your tax-free allowance. You need to report your tax yourself before paying it if it is. 

There are deadlines for reporting your capital gains and their tax depending on the asset sold. If you sold a residential property asset on or after 27 October 2021, then you must report and pay within 60 days. 

If the completion date was between 6 April 2020 and 26 October 2021 you must report and pay within 30 days of completion.

Any Capital Gains Tax on assets that aren’t residential property doesn’t have a 60-day rule but rather is simply declared on your tax return for the relevant tax year.


Can you reduce Capital Gains Tax?

Have you figured out your Capital Gains Tax if you sell right now and you’re unhappy with how high the number is? Well, don’t worry because there are some tactics you can use to reduce the total amount.


Don’t sell too early

When you sell your asset in under a year, you’re going to have a higher Capital Gains Tax rate to pay out. Therefore, your best bet is to not sell your investment too soon and wait until you pay out a lower Capital Gains Tax rate.

 However, this isn’t always probable, and you may find that you have to sell to get some of your money back. Therefore, only keep your asset for longer than a year if you can afford to do so and if you will make a higher return on investment when you do decide to sell. 


Choose a good retirement plan

If you place your investments into a retirement plan instead of a physical asset, then you won’t be subject to immediate taxes. At the same time, once you have retired, you can also buy and sell other assets without having to pay the Capital Gains Tax. 

Therefore, you may want to wait until you’re retired before you start investing in property or any other forms of assets. It will reduce your Capital Gains Tax in the long run and ensure you and your family are set up for the future with fewer losses. 


Utilise capital losses

If you have multiple investments each year, when you sell an asset, your capital gains could be lower if you offset them against any of your capital losses. This could mean your overall amount falls under your tax-free allowance, and you don’t have to pay any taxes. 

At the same time, it could reduce the overall % you pay on your Capital Gains Tax, too, even if you have higher capital gains than losses. It isn’t the best situation to wish for, but you aren’t always going to have a year full of gains, so you may as well make the most out of your losses. 


Where can I find more information?

Even with all this information, you may be unsure about whether you need to pay Capital Gains Tax or how much you need to pay. It could be because you have a unique situation and want to ensure you will pay the right amount. The best people to go to for extra help are Reed & Co. Accountants

Our accountants have expert knowledge and experience and can help ensure your Capital Gains Tax is figured out and ready to pay. We will put together the report for you and help you pay the taxes on time. All you have to do is get in touch with one of our accountants today, and we will talk you through the process.