Capital Gains Tax (CGT): What Is It and How Does It Affect You?
Capital Gains Tax (CGT) is a tax levied on the profit you make when you sell or dispose of certain assets that have increased in value. This includes property, shares, or valuable items like art. It’s not the total value of the asset that gets taxed but the profit—the difference between what you paid for the asset and what you sold it for.
Current Capital Gains Tax Rates (2024)
The tax rate you pay on your gains depends on your income tax bracket:
Basic Rate Taxpayer:
10% on gains from most assets (e.g., shares)
18% on gains from residential property
Higher Rate Taxpayer:
20% on gains from most assets
24% on gains from residential property
28% on gains from "carried interest" (profits earned by investment fund managers)
Annual Allowance
Everyone in the UK is given an annual CGT allowance before they become liable to pay the tax. For the 2024 tax year, the allowance has dropped to £3,000, a significant reduction from the £12,300 allowance available just a few years ago. Any profit above this threshold in the tax year (April 6 to April 5) is subject to CGT.
Working Example
Let’s say you bought a second home for £150,000 a few years ago and have now sold it for £200,000, resulting in a £50,000 profit. Here’s how CGT might apply:
Your profit is £50,000.
Subtract your £3,000 CGT allowance, leaving £47,000 subject to tax.
If you are a higher-rate taxpayer, you will pay CGT at 24% on residential property.
24% of £47,000 equals £11,280, which is the CGT you’ll owe.
Is CGT Only for the Wealthy?
There’s a common misconception that only wealthy individuals pay CGT, but this isn’t true. As house prices rise, stock values increase, and tax allowances shrink, more middle-income individuals find themselves liable for CGT.
This phenomenon is called fiscal drag. When tax thresholds stay the same or decrease, but asset values go up, more people are "dragged" into paying taxes they weren’t liable for previously. It’s a subtle way for governments to raise more revenue without overtly increasing tax rates, and it's one reason why CGT is becoming more relevant for people across income levels.
Changes to CGT in 2024
While the rates themselves haven’t changed dramatically, the cut in the annual allowance from £12,300 to £3,000 means more people are likely to face a CGT bill. This reduction makes it harder to avoid paying CGT on even modest gains.
Conclusion
Capital Gains Tax affects a growing number of people, not just the wealthy. With the annual allowance shrinking and asset values rising, it’s important to stay informed about how CGT could impact you. Proper planning can help reduce your tax liability, but with fiscal drag in play, it's becoming harder to avoid the taxman’s reach.
