Capital Gains Tax Made Simple

Ever sold a house, stocks, or a piece of art and wondered why the tax office wants a cut? That’s capital gains tax, or CGT for short. It’s the tax you pay on the profit you make when you sell something valuable. The good news is you can understand it quickly and even keep more of your earnings.

How Capital Gains Tax Is Calculated

First, figure out the profit. Subtract what you paid for the asset (the “cost basis”) from the sale price. If you spent £10,000 on a painting and sold it for £15,000, your gain is £5,000. That £5,000 is what the tax office looks at.

Next, check the rate. In the UK, most people pay the same rate as their income tax on gains – 10% if you’re a basic‑rate taxpayer, 20% if you’re higher‑rate. There are lower rates for some assets, like residential property, where it can be 18% or 28%.

Don’t forget allowances. Everyone gets an annual tax‑free allowance – currently £6,000. If your total gains for the year are below that, you pay nothing. Anything above the allowance gets taxed at the rates mentioned.

Ways to Reduce Your Capital Gains Tax

One easy trick is timing. If you can hold onto an asset for a year or more, you become a “long‑term” holder, which can qualify for lower rates on some assets. Also, consider using losses. If you sold another investment at a loss, you can offset that loss against your gain, lowering the taxable amount.

Another tip is gifting. Giving an asset to a spouse or civil partner transfers the tax charge. Since each person has their own allowance, you can split a large gain and stay under the tax‑free limit for both.

Keep good records. Receipts, purchase contracts, and improvement costs all count toward your cost basis. Missing paperwork can mean you over‑pay.

Finally, think about investing in tax‑efficient wrappers like ISAs or pensions. Gains inside an ISA are tax‑free, so moving money into one before you sell can save you a lot.

Bottom line: capital gains tax isn’t mysterious, but it does need a bit of planning. Figure out your profit, apply the allowance, watch the rates, and use timing, losses, or gifting to keep your bill low. With a simple checklist, you’ll stay in control of your investments and avoid surprise tax bills.

Gareth Sheffield

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