What Is Capital Gains Tax in the UK?

A commonly forgotten expense of investing is taxes. And for UK investors not using a Stocks and Shares ISA, understanding what capital gains tax is and how it works is critical. These costs can sometimes get a bit complicated, so let’s break it down to basics.

What are capital gains?

A capital gain is any profit an investor makes based on the increase in value of their investments. In the case of stocks, this refers to a rise in share price. One thing to note is that capital gains do not apply to any dividends received. Dividends have their own set of tax rules.

Let’s look at an example. An investor has just purchased £1,000 worth of shares at 100p each. This proved to be a good investment because a year later, the shares are now worth 135p – a 35% gain. This investor decides to take their profits and now has £1,350 in their trading account.

The £350 is the capital gain and is subject to capital gains taxes.

What is capital gains tax?

Capital gains tax is the tax an investor has to pay when they sell shares that have increased in value. However, it also applies to other types of assets outside of the stock market.

Some common examples include:

• bonds (excluding government gilts and qualifying corporate bonds)
• residential property
• cryptocurrencies
• cars
• jewellery

It’s also worth noting that capital gains tax doesn’t apply to just sold assets. It also affects gifts, transfers to another person, asset swapping, and insurance compensation.

What is the capital gains tax rate in the UK?

There are two classes of capital gains tax rates in the UK.

• Basic rate: applies to any individual earning less than or equal to £50,270 in annual income
• Higher rate: applies to any individual earning more than £50,270 in annual income

Depending on the asset that’s being disposed of, each class charges a different rate.

What is the annual capital gains tax allowance?

Fortunately, the UK government provides individuals with tax relief through the capital gains tax allowance. Any gains made below the CGT allowance threshold are not subject to taxes. 

In the 2022/23 tax year, the capital gains tax allowance stands at £12,300. In other words, if a UK investor sells some of their shares and the total gains are less than £12,300, none of their profits is subject to capital gains tax.

However, in 2022, Chancellor Jeremy Hunt announced planned cuts to the capital gains tax allowance.¹ As such, in the 2023/24 tax year, the taxable threshold will be reduced to £6,000. And in the 2024/25 tax year, this threshold will be lowered even further to £3,000.

How is capital gains tax calculated?

As highlighted above, capital gains tax only applies to an investor’s total gain above and beyond the capital gains tax allowance threshold. So, let’s look at a basic example.

An investor earning £48,000 in annual income has built up an investment portfolio worth £450,000. A year later, thanks to some savvy investing decisions, their portfolio is worth £480,000. And they decide to sell some shares and take the £30,000 profit to help pay for a new car. How much capital gains tax do they need to pay?

To keep things simple, let’s assume they haven’t sold any losing positions to offset gains, and all their investments were made at the same time.

The first step is to eliminate the CGT allowance. At £12,300, this reduces the taxable gain to £17,700. Then the appropriate tax rate needs to be applied. The investor is earning less than £50,270 in annual income, so the basic capital gains tax rate of 10% applies. 10% of £17,700 is £1,770; therefore, the investor needs to pay £1,770 in capital gains tax.

Note that as of April 2023, this tax will increase to £2,400 due to the capital gains tax allowance cut. And in April 2024, the CGT liability will jump even higher to £2,700. All the more reason to use clever strategies to avoid paying capital gains tax, such as investing with a tax-efficient account like a Stocks and Shares ISA.

When do you pay capital gains tax?

The time to pay capital gains tax depends on the type of asset being sold. In the case of stocks, all capital gains need to be paid by 31 January after the end of the current tax year.

From the example above, the investor has £1,770 worth of capital gains tax to pay from selling shares between April 2022 and April 2023. In that case, this bill must be paid before 31 January 2024. 

However, the rules are different when it comes to UK residential property. Any capital gains must be reported and paid within 60 days of the sale using the HMRC online tax portal.

How to report capital gains on your tax return  

Capital gains tax on profits from selling stocks and shares must be reported on a Self-Assessment Tax Return. Using HMRC’s online portal, this tax form can be filled out using the step-by-step guide provided. 

After calculating the amount of capital gains tax owed from stock sales throughout the year, this value will need to be inputted into the appropriate box. Investors also need to include additional details such as:

• The price paid and the price sold for the shares
• The date when the shares were purchased and sold
• The trading costs when buying and selling the shares

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.