Selling off assets for a profit can be a great way to make some extra cash quickly. However, if your profit is above a certain threshold, you may have to pay capital gains tax on it.

This guide will tell you everything you need to know about capital gains tax, including:

  • What capital gains tax is, and how it works
  • When you need to pay it
  • What capital gains allowance is
  • How you get taxed on capital gains
  • How to work out how much you owe
  • How Countingup can help you stay on top of your taxes

What is capital gains tax?

Capital gains tax is a tax you pay when selling (or disposing of) an asset (valuable item) that’s increased in value. You pay the tax on the profit you make when selling the item, not the total amount you sell it for.

When you sell an asset, the capital gains are referred to as “realised”, meaning you’ve made use of it.

However, capital gains tax doesn’t apply to unsold investments or assets (or unrealised capital gains). So if you own stock shares that increase in value every year, you won’t acquire any capital gains until you sell them. It doesn’t matter how long you hold them for.

Bear in mind that any profits you make from buying and selling assets held less than a year are taxed at a higher rate. This is likely to prevent people from continually buying assets just to sell them off for a profit.

When do I need to pay capital gains tax?

You pay Capital Gains Tax on the gain when you sell (or ‘dispose of’):

  • Most personal possessions worth £6,000 or more, apart from your car 
  • Property that isn’t your main home
  • Your main home if it’s very large or if you let it out or use it for business
  • Shares you hold that aren’t in an Individual Savings Account (ISA) or Personal Equity Plan (PEP)
  • Business assets

These items are known as ‘chargeable assets’. You may be able to claim tax relief on some assets. For example, if it falls within your capital gains tax allowance (explained below), invest the money in an ISA or PEP, or transfer the asset to your spouse. If you sell an asset you jointly own with someone else, you pay capital gains on your share.

What is capital gains allowance?

Capital gains allowance refers to a set amount of profit you can make from selling an asset without paying capital gains tax on it. If you own an asset with someone else, you can use your joint allowance to double the amount you can make before having to pay capital gains tax.

If you’re married or in a civil partnership, you can transfer your assets to your partner without capital gains getting charged.

The capital gains tax allowance in 2021-22 is as follows:

  • For an individual: £12,300
  • For a couple (married or civil partnership): £24,600

Note for if you choose to transfer any of your assets to your partner: when you sell it, you’ll be charged based on the gain you made during the time you owned it as a couple –– not since you passed the asset onto your partner.  

It’s also worth noting that if you don’t use your allowance in a given tax year, you can’t carry it forward to the next.

How do I get taxed on capital gains?

If you’re a basic rate taxpayer (20%), your capital gains rate depends on how much profit you make, your taxable income, and the type of asset you sold.

If you’re a higher (40%) or additional rate (45%) taxpayer, you’ll pay:

  • 28% on your gains from residential property
  • 20% on your gains from other chargeable assets

These income tax brackets are based on England, Wales and Northern Ireland. Scotland has slightly different rules. You can find out more about how personal allowance and income tax work across the UK in this guide.

How do I work out my capital gains tax?

If your income makes you a basic-rate (20%) taxpayer, but you have made large enough capital gains to push you into a higher-rate tax bracket, you will pay the higher rate of CGT on the amount that takes you over the threshold.  It works like this: 

Step 1

Work out your taxable income by deducting your tax-free personal allowance (£12,570 in 2021-22) from your total income. 

Step 2 

Calculate your taxable capital gains by subtracting the tax-free allowance (£12,300 in 2021-2022) from your profits. You can also deduct the costs of improving your assets but not maintaining them. If you rent out a property, you may deduct maintenance costs against any income tax you’re charged from the rent you charge.

Step 3 

Add your taxable capital gain to your taxable income. If the total sum of the two is less than £37,700, you pay basic rate capital gains tax, which is:

  • 10% on most investments
  • 18% on second homes

If your taxable capital gains and income add up to more than the £37,700 threshold, you pay the basic rate on the part below it. You then pay the higher rate on the remaining sum, which is:

  • 20% on most investments
  • 28% for second homes

Even if you’re in Scotland, capital gains tax is calculated based on the UK thresholds rather than on the Scottish income tax bands. As a result, it increases the possibility that you could be a higher-rate Scottish taxpayer but still pay the basic rate on capital gains.

How Countingup helps you stay on top of your taxes

Countingup is a business current account that comes with free built-in accounting software that automates the time-consuming aspects of bookkeeping and taxes. Instant invoicing, automatic expense categorisation and cash flow insights mean that you can confidently keep on top of your business finances every day.

You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags, or inaccuracies. It is seamless, simple, and straightforward!

Download the Countingup app to apply for your business current account in minutes. All you need is proof of ID and a photograph of yourself. Download the app here.

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