How Much is Capital Gains Tax?

Understanding Who Pays Capital Gains Tax (CGT)

Capital Gains Tax (CGT) applies to various individuals and entities, with specific rules governing its application. Here's a breakdown of who is subject to CGT and the nuances for different types of taxpayers.

Who Pays Capital Gains Tax?

1. Private Individuals: Individuals who sell personal assets that have increased in value may be liable for CGT.

2. Self-Employed Sole Traders: Sole traders must pay CGT on the sale of business assets.

3. Partners in Business Partnerships: Partners must pay CGT on their share of gains from partnership assets.

4. Company Owners: Owners may owe CGT on the personal profit from selling all or part of their company.

5. Trustees: Trustees managing trust assets must pay CGT on gains from these assets.

6. Personal Representatives of Deceased Persons: Representatives handling the estate of a deceased person must pay CGT on any gains from the sale of the deceased’s assets.

General Principles of Capital Gains Tax

1. No Tax on Primary Residence: You typically do not pay CGT when you sell your main home.

2. Different Rates for Different Assets: CGT rates differ for residential property, carried interest from investment funds, and other assets.

Higher or Additional Rate Taxpayers                         

If you’re a higher or additional rate taxpayer, the CGT rates are as follows:

• Residential Property: 24%

• Carried Interest (investment fund gains): 28%

• Other Chargeable Assets: 20%

Basic Rate Taxpayers

For basic rate taxpayers, the CGT rate depends on the size of your gain, your taxable income, and whether the gain is from residential property or other assets. Here’s how to calculate it:

1. Calculate Taxable Income: This is your total income minus your Personal Allowance and any other Income Tax reliefs.

2. Calculate Total Taxable Gains: Add up all your gains.

3. Deduct Tax-Free Allowance: Subtract your tax-free CGT allowance from your total gains. For the 2024/2025 tax year, the allowance is £3,000.

4. Combine with Taxable Income: Add your taxable gains (after the allowance) to your taxable income.

5. Apply Basic Rate Band: If the combined amount is within the basic Income Tax band (£37,700 for the 2024/2025 tax year), you pay:

• 10% on gains from other assets (18% for residential property and carried interest).

• 20% on any amount above the basic rate band (24% for residential property and 28% for carried interest).

Example Calculation

• Taxable Income: £20,000

• Taxable Gains: £12,600 (not from residential property)

• Tax-Free Allowance: £3,000

Step-by-Step Calculation:

1. Deduct the allowance: £12,600 - £3,000 = £9,600

2. Add to taxable income: £20,000 + £9,600 = £29,600

3. Since £29,600 is less than the basic rate band of £37,700, you pay 10% on £9,600.

4. Capital Gains Tax: £9,600 x 10% = £960

Mixed Gains (Residential Property and Other Assets)

If you have gains from both residential property and other assets, use your tax-free allowance against the gains taxed at the highest rate first.

Trustees, Personal Representatives, and Businesses

• Trustees/Personal Representatives:

• Residential Property: 24%

• Other Chargeable Assets: 20%

• Carried Interest: 28%

• Business Owners (Sole Traders/Partnerships):

• Business Asset Disposal Relief: 10% on qualifying gains.

Summary

Understanding the nuances of Capital Gains Tax can help you minimize your tax liability effectively. Always calculate your taxable income and gains accurately, utilize your tax-free allowance wisely, and be aware of the specific rates applicable to your situation. For precise tax planning and to ensure compliance, consider consulting a tax professional.

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