Reducing the impact of capital gains tax

What you need to know

Selling an asset is often a major financial decision. Yet while considerable thought is usually given to how much you hope to sell for and when you’d like to complete the transaction, the tax implications of the sale can be overlooked.

Capital gains tax (CGT) can quickly change the profile of your return on an investment. This tax can be as high as 28%, meaning investors must think carefully about when they sell and make the most of annual allowances.

In this guide we will explain some key considerations for investors looking to sell, but please note Rothschild & Co does not provide tax advice and you should contact a tax adviser before making any financial decisions. We work with a network of tax experts who can help you make the best decision for your circumstances.

What is capital gains tax and how is it calculated?

CGT is payable when you dispose of an asset that has risen in value. You pay tax on the growth in value – known as the ‘gain’ – rather than the sale price you receive.¹

For example, if you bought a painting for £10,000 in 2022 and sold it for £20,000 a year later, your taxable gain would be £10,000.

CGT will not only apply to the sale of an asset, but also to many gifts. In these cases CGT is calculated by reference to the market value of the asset at the date of the gift.

The tax is paid by individuals, trustees and personal representatives if they are UK resident. Those not resident in the UK pay CGT on UK property. 

Here are some other key facts:

• CGT is applied at 20% on the sale of most investments. Shares are not readily identifiable as separate assets so for CGT purposes the cost of your shares in a company are ‘pooled’
• Cryptocurrency is an asset for CGT purposes and so care is needed in relation to such transactions

What is exempt from capital gains tax?

• You don’t pay CGT on ISAs, premium bonds, or betting or lottery winnings. Gifts to charity are also exempt from CGT
• Companies pay corporation tax on the profits they make, rather than being liable for CGT.

If you sell an asset at a loss, you can offset that loss against a gain you make in the same or a subsequent tax year. However, losses cannot be carried back to prior tax years and you must claim your loss on your tax return.²

Timing your sale

CGT is based on the date you dispose of the asset, for instance the date you sign a contract. However, the tax is – in many cases – not due until the 31 January that follows the end of the tax year in which the disposal takes place.⁴

This means that timing is very important for CGT purposes. You can achieve a cash flow advantage by careful planning.

For example, James sells his shares in ABC Ltd on 4 April 2023. He must pay HM Revenue & Customs (HMRC) on 31 January 2024. His neighbour, Susan, sold her shares on 6 April 2023. She doesn’t need to pay the taxman until 31 January 2025 and is able to invest her profits for an extra year before the tax is payable.

This cash flow advantage no longer works for CGT on the sale of a home, as this must be paid within 60 days regardless.

What tax reliefs are available?

The government provides some reliefs and exemptions that can help reduce your CGT bill.

Every taxpayer has an annual exemption and you only pay CGT on your gains above this tax-free allowance. The allowance has fallen in recent years. It is £3,000 in the 2024-25 tax year.⁵

Every member of your family has an allowance – including your children – and the allowance cannot be carried forward to a later tax year. So you must use it or lose it.⁶

Other key rules to remember include:

• You don’t pay CGT when you sell your main home, provided the grounds are not too excessive
• There’s no CGT when you pass assets to your spouse. This means it may be possible to place income producing assets in their name if they’re not using their personal tax allowances
• Certain investments – such as gilts – are exempt from CGT and can, subject to investment advice, play an important role in a portfolio
• When a person dies and their assets are inherited by someone else, the calculation period for CGT is effectively reset. This is often referred to as a 'tax free uplift'. The inheritor is seen to have acquired the assets for their market value on the date of death for tax purposes.

Relief for company owners

Tax relief is available to company owners selling a business. Making use of allowances can result in a significant tax saving.

Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) can reduce the CGT rate to 10% on the first £1 million of proceeds.

Article updated September 2024.

Citations

[1] Capital Gains Tax: what you pay it on, rates and allowances, Gov.uk

[2] Capital Gains Tax: what you pay it on, rates and allowances: If you make a loss, Gov.uk

[3] Capital Gains Tax: what you pay it on, rates and allowances: Capital Gains Tax rates, Gov.uk

[4] Capital Gains Tax: what you pay it on, rates and allowances: What you pay it on, Gov.uk

[5] Capital gains tax, Office for Budget Responsibility 

[6] Capital Gains Tax: what you pay it on, rates and allowances: Gifts to your spouse or charity, Gov.uk

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