Currently, four different rates of capital gains tax (CGT) exist in the UK: 28%, 20%, 18% and 10%. The rate of CGT that you may be subject to depends on the income tax band you fall into, as well as the type of asset on which your capital gain was made. The capital gains tax rates in the UK are not currently scheduled to change over the coming years (unlike the CGT threshold), but the individual CGT rates you pay could differ if the rate of income tax you pay changes. The UK CGT rates as of the 2022/23 tax year are as follows: These rates are scheduled to remain for the 2023/24 tax year, as illustrated in the table below, even as higher and additional rate income tax bands are set to change on April 6 2023:
For example: If you bought a second residential property for £200,000 and later sold it for £350,000, realising a gain of £150,000, this could attract a capital gains tax liability of £42,000 (if you are a higher or additional rate taxpayer, and your CGT allowance for the tax year has already been fully utilised).
If you are a basic rate income taxpayer, this same gain could result in a CGT liability of £27,000 (again, provided that your CGT threshold for the tax year has already been used fully).
Which assets can be subject to capital gains tax?
Capital gains tax can be due on any profit you realise from disposing of a chargeable asset.
Disposing of an asset can be defined as selling it, giving it away as a gift (to anyone other than your spouse or a charity), swapping it for something else, or receiving compensation for it (like an insurance payout if it has been lost or destroyed).
The following assets are classed as chargeable assets and could attract a CGT bill when disposed of:
- Property that is not your primary residence
- Your main property – only if it’s larger than 5,000 square metres (just over one acre), you have let it out, or used part of it exclusively for business purposes
- Individual possessions worth more than £6,000 (excluding your car)
- Business assets
- Some types of cryptocurrency
- Investments that aren’t held in tax-efficient wrappers
The capital gains tax allowance: what is it?
When calculating your annual capital gains from disposing of chargeable assets, it’s important to account for the capital gains tax allowance (also known as the annual exempt amount, or AEA) – the amount you are permitted to earn per year from capital gains, free of tax.
You only need to pay capital gains tax if your overall gains for the tax year (after deducting any losses and applying any reliefs) are above the annual exempt amount.
- In the 2019/20 tax year, the AEA was £12,000
- This rose to £12,300 in the 2020/21 tax year, and remained at this level until 2022/23
- As of the 2023/24 tax year, the AEA is scheduled to fall to £6,000
- As of the 2024/25 tax year, the allowance is set to halve to £3,000
For example: If you’re a higher rate income taxpayer and you sold investment shares (not held within any tax-efficient wrappers) worth £25,000 in the 2022/23 tax year – and hadn’t used up any of your CGT allowance before this sale – a CGT liability of £2,540 would arise (£25,000 - £12,300 AEA equals a taxable gain of £12,700, taxed at 20%).
Compared with this, if the exact same scenario occurred in the 2024/25 tax year, the higher rate income taxpayer could face a CGT bill of £4,400 (£25,000 - £3,000 AEA equals a taxable gain of £22,000, taxed at 20%).
So, with the capital gains tax free allowance set to fall significantly within a short time frame, maximising tax-efficiency could prove crucial to retain as much of wealth as possible, especially for high-net-worth individuals and experienced investors looking for ways to reduce or even avoid certain capital gains tax bills entirely.
Record capital gains tax collected in the UK in 2022
As announced by Chancellor Jeremy Hunt in the Autumn Statement 2022, many tax bands and thresholds are set to change, and some are to be frozen for an extended period. This fiscal policy is impacting capital gains tax, as well as income tax, National Insurance, inheritance tax and dividends tax.
Even before these announcements have fully come into force, the UK’s CGT revenue reached £15 billion in the year to October 31 2022 – an increase of 27% in just one year. This is the first time that UK CGT receipts have exceeded £15 billion, further emphasising the need for high-net-worth individuals and sophisticated investors, in particular, to organise their assets in a tax-efficient manner, enabling more of their wealth to be retained and eventually passed on to their beneficiaries.
These circ*mstances have seen the potential benefits of tax-efficient investment vehicles such as the EIS and SEIS increase considerably. Especially with the SEIS rules being made more generous and the EIS sunset clause being extended, investors can continue to make use of these schemes, aiming to counteract the added tax strain that is likely to be felt in the near future.
