Introduction: 

Capital Gains Tax (CGT) is a tax on the profit made from selling an asset, such as property, shares, or other investments. For property owners and investors in London, CGT can significantly impact the profits from selling a property or investment. Understanding how CGT works, the allowances available, and strategies to minimise the tax burden is essential to ensuring that you are not overpaying. In this article, we’ll break down everything you need to know about CGT, including how it is calculated, when it applies, and strategies for reducing the amount of tax you owe. 

1. What is Capital Gains Tax? 

Capital Gains Tax is levied on the profit made when you sell or dispose of an asset that has increased in value. It applies to assets such as: 

• Property: If you sell a property for more than you paid for it, CGT is charged on the profit. This is especially relevant for property investors or those selling second homes. 
• Shares: If you sell shares or investments for a profit, CGT applies to the gain made on the sale. 
• Business Assets: If you sell a business asset, such as a share in your company, you may also need to pay CGT on any profit made. 

CGT is not applied to the full sale price of the asset, but rather to the profit made (i.e., the difference between the selling price and the original purchase price). 

2. How is Capital Gains Tax Calculated? 

The calculation of CGT is relatively straightforward, but there are several factors that can impact the amount of tax you owe. 

• Step 1: Calculate the Gain: The first step is to calculate the gain made from the sale of the asset. This is done by subtracting the original purchase price (including any allowable costs like legal fees, stamp duty, or improvement costs) from the selling price. For example, if you bought a property for £200,000 and sold it for £300,000, your gain is £100,000. 
• Step 2: Apply the Tax-Free Allowance: The UK provides an annual tax-free allowance called the Annual Exempt Amount (AEA), which is £12,300 for individuals (as of 2023/2024). This means that you do not have to pay CGT on the first £12,300 of your gain. 
• Step 3: Tax Rate: Once you’ve calculated your gain and applied the tax-free allowance, the remaining profit is subject to CGT. The tax rate depends on your overall income and the type of asset sold: 
• Basic Rate Taxpayers: If your income (including the gain) is below the higher rate threshold (£50,270 for the 2023/2024 tax year), CGT is charged at 10%. 
• Higher Rate Taxpayers: If your income exceeds the higher rate threshold, CGT is charged at 20%. 
• Residential Property: If you sell residential property that is not your main home, the CGT rate is higher. The rate is 18% for basic rate taxpayers and 28% for higher rate taxpayers. 

Tip: Keep records of all costs associated with the purchase and sale of assets, including improvements made to property, as these can be deducted from the sale price when calculating the gain. 

3. What Assets Are Exempt from Capital Gains Tax? 

While CGT applies to many assets, there are some exceptions where no tax is due: 

• Your Primary Residence: If you sell your main home, you may be eligible for Private Residence Relief. This relief exempts any profit made on the sale of your primary residence from CGT, provided the property has been your main home throughout your period of ownership. There are some exceptions, such as if you have rented out part of your property or if it is larger than the average residential home. 
• Gifts to Charities: Gifts to registered charities are exempt from CGT. If you donate assets such as property or shares to a charity, no CGT is due. 
• ISAs and Pensions: Investments held in an ISA (Individual Savings Account) or pension scheme are exempt from CGT. The growth of investments within these accounts is tax-free, which can provide a valuable tax-saving strategy. 

4. Reliefs and Allowances to Reduce CGT 

There are several reliefs and allowances available that can reduce your CGT liability. These include: 

• Private Residence Relief: As mentioned earlier, this relief exempts gains made on the sale of your primary home from CGT. However, if you have used the property for business purposes or let part of it, the relief may be restricted. 
• Letting Relief: If you have rented out part of your home, you may qualify for Letting Relief, which can further reduce your CGT liability. However, this relief is now only available if you, as the owner, are in shared occupancy with the tenant. 
• Entrepreneurs’ Relief: If you sell your business, you may be eligible for Entrepreneurs’ Relief, which can reduce the CGT rate to 10% on the first £1 million of gains. This relief is designed to encourage individuals to invest in and grow businesses. 
• Investors’ Relief: This relief applies to shares in unlisted trading companies and is available to individuals who have held the shares for a minimum of three years. It allows you to pay a reduced CGT rate of 10%. 
• Rollover Relief: If you sell certain business assets and use the proceeds to purchase similar assets, you may be able to defer CGT until the new assets are sold. This is known as Rollover Relief and applies to business assets such as land, machinery, or buildings. 

Tip: Consult with an accountant or tax advisor to determine which reliefs you may qualify for, as they can significantly reduce your CGT liability. 

5. Planning Strategies to Minimise Capital Gains Tax 

There are several strategies you can adopt to reduce your CGT liability and manage your gains effectively. 

• Use the Annual Exempt Amount: Each individual has an annual tax-free allowance (£12,300 for 2023/2024). If you have multiple assets to sell, consider spreading the sales across different tax years to maximise the use of the exemption. 
• Offsetting Losses: If you have made losses on other assets, you can offset these losses against any gains to reduce your taxable gain. This strategy is known as loss harvesting and can be an effective way to reduce your CGT bill. 
• Gifting Assets: In some cases, you may choose to gift assets to family members, as they may have a lower income and be subject to a lower CGT rate. However, this can have implications for inheritance tax, so it’s essential to seek professional advice before taking this route. 
• Hold Assets for Longer: The longer you hold onto an asset, the more likely it is to qualify for tax-efficient reliefs or allowances. In some cases, assets held for more than a year may qualify for a lower CGT rate, depending on the specific asset type and reliefs available. 

Conclusion: 

Capital Gains Tax is an essential consideration for property owners, investors, and business owners in London. By understanding how CGT is calculated, which assets are subject to tax, and the various reliefs and strategies available, you can minimise your tax liability and retain more of your profits. Whether you’re selling property, shares, or other investments, careful tax planning is key to maximising your returns and staying compliant with HMRC regulations. 

If you're planning to sell an asset or need help understanding how CGT applies to your investments, contact our team of experts at East London Accountants. We can help you navigate the complexities of Capital Gains Tax and ensure you minimise your tax liability. Get in touch today at hello@eastlondonaccountants.com or call 020 7118 0057 for personalised advice. 

FAQs: 

1. How can I reduce my Capital Gains Tax liability? 

You can reduce your CGT liability by claiming reliefs such as Private Residence Relief, Entrepreneurs’ Relief, and using the Annual Exempt Amount. Additionally, offsetting losses or spreading asset sales across multiple years can help reduce your taxable gain. 

2. What happens if I don't pay Capital Gains Tax? 

Failure to pay CGT can result in significant penalties and interest charges. It’s important to report any gains to HMRC and pay any tax due on time to avoid penalties.