Understanding capital gains tax for investors

What is capital gains tax? 

Capital gains tax (CGT) is the tax you are required to pay when you sell or ‘dispose of' an asset for a profit, or 'gain'. Some assets are free from CGT, as we'll discuss shortly. And while we each have a CGT allowance (the threshold at which your tax liability will kick in), recent reductions in the threshold mean that more individuals may find themselves liable to pay CGT on their investment gains. This is especially the case if you have investments outside of tax wrappers, such as ISAs and pensions. 

A capital gain is, broadly speaking, the difference between the price you paid for something and the price you sell it for. The tax you pay is on the gain only – not the total sale price.

For example, if you were to buy a piece of art for £5,000 and later sold it for £20,000, you’ve made a £15,000 gain on the asset and you may need to pay capital gains tax on the £15,000.

What do you pay capital gains tax on?  

Some assets are exempt from capital gains tax, such as assets held within tax wrappers such as ISA, Lifetime ISA, Junior ISA or pension, and gifts to UK registered charities. You will usually need to pay CGT when you sell, or dispose of:

• Shares or other investments held outside of tax wrappers.
• Most personal possessions worth over £6,000 (excluding cars). this includes items such as jewelry, paintings, antiques, collectibles (such as stamps or coins).
• Property that is not your main residence: for example, a buy-to-let property or a holiday home.
• Your main home if you’ve let part of it out (this does not include having a lodger), used it for business or if it’s a very large property.
• Business assets such as land, buildings, or equipment.

What is your capital gains tax annual allowance?

The current capital gains tax annual allowance, which ends on 5th April 2024, is £6,000. This allowance is the amount of gain an individual can make on the sale of assets in a tax year before they pay CGT.

However, from 6th April 2024, the allowance will be reduced to £3,000. This figure has already been reduced once, having stood at £12,300 in the previous tax year (2022/23). 

Our experts can discuss your options with you or answer any questions you may have around the reduction in the capital gains tax allowance. Book a free call to speak with the team. However, for your individual case, it is important to consult with tax specialists to discuss options and understand the implications of the reduction in the capital gains allowance. Keep in mind that Nutmeg cannot provide tax advice and can only offer general information. 

Returning to the example of selling your piece of art, and assuming you’ve disposed of no other assets in the current tax year, you would need to pay CGT on £9,000 – the capital gain (£15,000) less the CGT allowance (£6,000).

If you were to make the same transaction from 6th April in the 2024/25 tax year, you would need to pay CGT on £12,000 - the same £15,000 capital gain minus the reduced allowance of £3,000. 

It’s important to note that for CGT purposes the disposal of an asset includes selling it, giving it away as a gift (although there are special rules for CGT on gifts to your spouse or civil partner or charity), transferring it to someone else, swapping it for something else or getting compensation for it (such as an insurance payout if it’s been lost or stolen).  

How much capital gains tax will you have to pay?

When calculating the amount of CGT you need to pay, different rates apply based on your income level and the type of asset – CGT rates are different for residential property than they are for other assets.

For people who pay income tax at the higher or additional rate, your capital gains tax rate is 28% for gains from residential property, and 20% on gains from other assets.

If you’re a basic rate taxpayer, then there’s a little more to calculate:

1. You need to know your taxable income. This is your income, minus the personal allowance and any other income tax reliefs you’re entitled to.
2. You need to know your total taxable gains after the CGT annual allowance (currently £6,000 for the 2023/24 tax year, and £3,000 for 2024/25)
3. Add your taxable income to your total taxable gain after the annual allowance.

If this figure is still within the basic rate of income tax band, currently £12,571 – £50,270, then you’ll pay 18% for gains from residential property and 10% on gains from other assets. Any gains above £50,270 are taxable at 28% or 20%.

Calculating CGT can be complex, there are online tools and guides available to assist you. Nutmeg’s capital gains tax calculator can help you estimate of your potential tax liability.

What the capital gains tax allowance cut means for investors?

The reduction of the CGT annual allowance could mean that people who have never been liable for paying CGT in the past may now be required to pay CGT when selling assets or on investment returns for money held outside a tax wrapper, for example in a general investment account.

It may be time to review  your ISA and Junior ISA allowances and consider optimising your investments within a tax wrappers. 

Note, that with all investing, your capital is at risk. Tax rules are subject to an individual's status and may change.

How investors can reduce their capital gains tax liability

One of the ways to minimise your capital gains tax liability can be to maximise your wrapper allowances. Every tax year, adults in the UK have an ISA allowance – currently £20,000. This means that you can put £20,000 into a cash ISA, stocks and shares ISA or innovative finance ISA (a high-risk investment, not offered by Nutmeg) or a combination of the three. It's worth noting that CGT is not payable on income (although income is subject to income tax), and also that any income generated from investments held within an ISA (interest, dividends or investment returns) will be exempt from income tax.

As the CGT annual allowance is reducing, so you may want to consider moving money from a general investment account into a stocks and shares ISA as early in the new tax year as possible. This can help to ensure that more of your investments – and therefore potential capital gains – are tax wrapped.

In addition to ISAs, money invested in a personal pension is also exempt from capital gains tax, although withdrawals from your pension are subject to income tax. The annual allowance for personal pension contributions - the most you can pay into pensions in a single tax year, and still receive tax relief - is £60,000 or 100% of your earnings, depending which is lower. So, for those who have money they don’t need to access until they retire, increasing pension contributions may be worthwhile. Please note that high earners may have a reduced pension annual allowance.

Our blog, Understanding tax relief on pensions, may be helpful in being tax efficient when planning for your retirement. 

There can be some additional tax reliefs or allowances that can help you minimise your capital gains liability and you may be able to offset any capital losses from a previous year against gains in the current your. Consult with tax experts to explore these options. 

Deadline for paying capital gains tax  

Depending on the type of asset, there are different rules about when you need to report your CGT liability and pay any tax owed. If you make gains on the sale of shares or other assets, you can use your self-assessment tax form to report the gain and pay what is due, up until 31st January of the year following your tax return period, so 31st January 2025 for the 2023/24 tax year. Gains on residential property need to be reported earlier.

If you do not have to complete a self-assessment tax return, there is a service on the gov.uk website to report capital gains in real time. The reporting deadline is December 31st of the year after the gain is made, with payment due by January 31st of the following year. 

Tax rules are subject to individual circumstances and may change over time. It is always recommended to consult with tax specialist to ensure accurate and up-to-date information. 

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Tax treatment depends on your individual circumstances and may change. You can normally only access your pension from age 55 (57 from 2028).  If you are unsure if a pension is right for you, please seek financial advice. 

For persons tax resident in Scotland the income tax personal tax allowances and income tax rates are different. However the CGT calculation rate limits above should still apply. https://www.gov.uk/scottish-income-tax