Understanding UK Capital Gains Tax Rates: Your Level of Income Will Affect the Amount of Capital Gains Tax That You Pay
Understand the complexities of Capital Gains Tax (“CGT”) in the UK, especially how this is affected by individual income tax levels
TAX TIPSCAPITAL GAINS TAX
Understanding UK Capital Gains Tax Rates:
Your Level of Income Will Affect the Amount of Capital Gains Tax That You Pay
Understanding the complexities of Capital Gains Tax (“CGT”) in the UK, especially how it interplays with individual income tax levels, is crucial for property investors and individuals selling assets like UK residential properties. This detailed guide aims to clarify the Capital Gains Tax rates that will be charged on the sale of an asset, focusing on their correlation with your income tax level, and includes a practical example for clarity.
Overview of Capital Gains Tax in the UK
Capital Gains Tax is a tax on the profit when you 'dispose of' an asset that has increased in value. This disposal may take place due to the sale of the asset, but it could also take place for a number of other reasons. These may include the gifting of an asset to a family member or friend, or the transfer of the asset as the result of an agreement or court order connected to the separation or divorce of spouses or civil partners.
It is the gain you make that is taxed, not the amount of money you receive. For the tax year ended 5th April 2024, CGT applies to various assets, including UK residential properties, with specific rules and exemptions.
Current Rates of CGT in the UK: Disposals From 6th April 2023 to 5th April 2024
The rates of CGT for residential land and property in the UK are currently:
18% for the basic rate of CGT, and
28% for the higher rate of CGT.
While CGT rates for commercial land and property, shares and other assets in the UK are currently:
10% for the basic rate of CGT, and
20% for the higher rate of CGT.
How Income Tax Affects The Rate of CGT You Pay
The rate of CGT you'll pay in the UK depends significantly on your income tax band. For the tax year ended 5th April 2024, there are distinct CGT rates for basic rate taxpayers and higher or additional rate taxpayers. It's essential to understand how your total income level and taxable gains determine your applicable CGT rate.
A common mistake that we see is to assume that if your income tax level means that you pay tax only at the basic rate of income tax, then all of your capital gain will be taxed at the basic rate of CGT rather than having a CGT charge at the higher rate of CGT. This is not always the case and will depend on the level of taxable income received and the amount of the capital gain that we are considering. See our example below to find out more.
There are also a number of exemptions and allowances that can reduce the amount of CGT that is payable.
For example, if you have lived in the property for a time during your period of ownership, you may be entitled to Principle Private Residence ("PPR") relief when you sell the property.
In most cases, you will also be eligible for a tax-free allowance of £6,000 (for the tax year ended 5th April 2024) per person per year, called the Annual Exempt Amount ("AEA"), which means that if your total capital gains fall below this amount, you may not need to pay any CGT at all.
Worked Example: Sale of a UK Residential Property
To help with understanding the principles above, we have provided an example of the CGT computation for the sale of a UK residential property which takes place in the year ended 5th April 2024.
Let's consider Mrs. A who has capital gains of £70,000 on the sale of a UK residential property. After deducting the £6,000 annual exemption, this gives Mrs. A a capital gain of £64,000.
Mrs A earns £35,000 before tax during the year of sale of the property and there are no other factors which affect her tax position.
To calculate the basic rate band which Mrs A has remaining, we take the £35,000 earnings from the £50,270 basic rate band limit, leaving £15,270.
Mrs A is then charged to CGT as follows on the taxable amount of £64,000:
Basic Rate CGT: £15,270 x 18% = £2,748.60
Higher Rate calculation: £64,000 - £15,270 = £48,730
Higher Rate CGT: £48,730 x 28% = £13,644.40
Total CGT: £2,748.60 + £13,644.40 = £16,393
Mrs A has a CGT liability of £16,393.
Please remember that this example is for illustrative purposes only and that in a real scenario there would likely be other factors to consider.
Navigating CGT with Professional Assistance
Understanding Capital Gains Tax rates in relation to your income tax band is critical for effectively managing your tax liabilities in the UK. For personalised advice and assistance in filing your CGT returns online with HMRC, professional guidance is highly recommended.
How we can help
This article aims to clarify the amount of Capital Gains Tax (CGT) that may be payable depending on your level of taxable income in the year of disposal of an asset, such as a UK residential property.
As Award-Winning Capital Gains Tax Specialists, we have assisted thousands of clients in ensuring that their capital gains circumstances are dealt with in an efficient manner, that any CGT due is at the lowest possible level while complying with the legislation and filing any CGT Returns online with HMRC within the deadlines for doing so.
Please note, non-UK callers may need to call +44207 101 3845 if your line cannot connect to our 0800 number.
Capital Gains Tax Expertise: The Tax Faculty LLP Managing Partner Charles Tateson Named UK Capital Gains Tax Advisor of the Year 2023
The Finance Monthly Taxation Awards recognises the achievements of tax professionals from around the globe.
Winning such an award is no small feat. It is a reflection of hard work, extensive knowledge, and an ability to navigate the intricacies of the UK tax system.
Read more about Charles and the award here.