Who Pays Capital Gains Tax and How Not To...

Who Pays The Most & Least Capital Gains Tax In The World?

The headline rate ignores lots of important detail, such as allowances and how different rates might apply to different people and assets, but the above table takes the broad generally highest applicable rate from a more detailed PWC analysis

What is Capital Gains Tax?

• It is the tax you pay on the profit or gain from selling things, such as investments. Gains from selling most assets are charged at 10% for basic-rate taxpayers, and 20% for higher-rate taxpayers.

  
  

• If you make a profit after selling a property (but not your home/primary residence) you'll pay 18% capital gains tax as a basic-rate taxpayer, or 24% if you pay a higher rate of tax.

  
  

Has The Tax Always Been With Us?

• The first comprehensive CGT was introduced by Labour Chancellor James Callaghan in 1965 following a large increase in property and other asset values from the end of World War II. According to Charles Stanley History of Taxation, high top rates of income tax at the time incentivised people to convert income into capital gains wherever they could to avoid tax, so the measure sought to bring the treatment of profit on capital closer to that of income.

  
  

• Broadly, individuals were given an ‘allowance’ of £1,000 a year with any gains above that subject to the tax, which started at 15%. However, with starting values based on 1965 prices it was a few years before it started to take effect, which was during the high inflation era of the 1970s.

Is All Profit Taxed?

• The capital gains tax allowance in 2024-25 is £3,000, half what it was in 2023-23. So you can earn £3,000 tax free.

  
  

• If you don't make full use of your CGT allowance in a given tax year, you aren't allowed to carry it forward to the next.

  
  

What If I Sell Some Stuff In The House - Do I Have To Pay Tax?

Generally, most property sold for more than £3,000 can be taxed under the capital gains rules.

These include:

• household furniture

• paintings, antiques, crockery, china and silverware

• jewellery

• collectible sets, such as chessmen, libraries of books or matching ornaments.

So called wasting assets - which are things with an expected life of 50 years or less are exempt from CGT

Is CGT Fair - As It Is Taxing Income Twice?

The Argument Against

The money you invest has already been taxed via income tax, so many argue that this is just double taxation and is unfair.

People's view on the fairness of this will differ, but it's certainly not unusual for the same pot of money to be taxed multiple times.

The VAT you pay on most goods, is also a 2nd tax on money you have already paid income tax on. The same is true for the Stamp Duty you pay on home purchases and Inheritance Tax.

The Argument For

It raises a lot of money whch is used to fund important services such as the NHS and education. In 2024-25 CGT is expected to raise £15.2 billion. This represents 1.3 per cent of all receipts and was equivalent to £530 per household and 0.5 per cent of national income, according to the OBR

The tax is on profit and in fact is charged at a lower rate than income tax. So someone earning £30,000 from going to work is already charged more tax than someone making the same £30,000 from the profit from investments and so it is only right that the profit from investments is at least taxed to some degree.

Are People Able to Avoid Paying The Tax and How Do They Do That?

1) Use or lose the annual CGT allowance

You can make £3,000 a year in profit wiothout paying the tax. So some people sell their assets when they near this limit, bank the profit and then invest in something else a month later. This used to be easier to do but they have now clamped down on the rules. HMRC will need to see you bought something different and didnt just sell and buy back the same thing - which you used to be able to do. Usually best to seek advice if you are amking use of this strategy.

2) Use ISAs

Gains on investments held in ISAs are free from capital gains tax altogether. The ISA allowance is £20,000 per tax year per person. So you can invest £20,000 a year without paying any CGT.

3) Transfer assets to your spouse

If your spouse or civil partner has not used their own capital gains tax allowance, you can transfer the assets to them, so as a couple you can avopidthe tax. As with much of this planning, the details are important and I'd advice you to get individual advice before taking this step.

4) Look out for losses

If you make a loss on any investments you sell, this can be offset against any gains before you deduct the tax-free allowance.

If you have any questions - we can try and answer them on Monday's Money Matters on Times Radio. Send me your question here or contact me on X (Twitter) @adamshawbiz