Capital gains tax (CGT) is a tax on the profit you make when you sell or ‘dispose of’ something, an ‘asset’ that’s increased in value. It’s the gain you make that’s taxed, not the amount of money you receive. In the UK, everyone has an annual exempt amount for capital gains tax. This means you don’t have to pay tax on capital gains below this threshold. Understanding how much tax-free capital gains you can make each tax year is important for effective tax planning.

What are Capital Gains?

Capital gains are profits you make when you sell or dispose of assets that have increased in value over time. Assets include things like:

• Shares or funds
• Property (second homes or buy-to-let properties)
• Personal possessions worth £6,000 or more (excluding your car)
• Cryptoassets like Bitcoin

For example, if you bought a painting for £5,000 and sold it later for £15,000, your capital gain would be £10,000. This is the profit you made from the increase in the value of the painting.

How Capital Gains Tax Works?

In the UK, capital gains tax is charged at 18% for basic rate taxpayers or 28% for higher rate taxpayers. However, everyone has an annual exemption – an amount of capital gains you can make tax-free each tax year.

The annual exempt amount for the 2022/23 tax year is £12,300. This means you don’t have to pay any capital gains tax if your total capital gains are below this threshold. If your capital gains exceed your exempt amount, you’ll only pay tax on the portion above the threshold.

For example, if you made total capital gains of £14,000 in 2022/23:

• The exempt amount is £12,300
• Capital gains above the exempt amount are £14,000 – £12,300 = £1,700
• You would only pay capital gains tax on £1,700 of your gains

The exempt amount of £12,300 is per individual. Each spouse or civil partner gets their exempt amount if you’re planning disposals jointly.

Assets Excluded from Capital Gains Tax

Some assets are excluded from capital gains tax when you dispose of them. These commonly include:

• Your main residence (the home you live in most of the time)
• Personal possessions worth less than £6,000
• UK government bonds (gilts)
• ISAs, PEPs and Premium Bonds
• Cars, motorcycles or other vehicles
• Transfers between spouses or civil partners

So you don’t have to pay capital gains tax when selling these assets, even if you made a gain on their disposal. The sale of your main home is generally exempt.

Making Use of Your Annual Exempt Amount

There are some smart ways investors can make full use of their CGT-exempt amount each year for tax planning purposes:

• Use it or lose it – your exempt amount doesn’t roll over. Use your full allowance each year.
• Make disposals across tax years – spread out disposals so gains fall into different tax years to utilise more than one exempt amount.
• Offset losses – offset capital losses against capital gains to lower taxable amounts.
• Transfer assets to spouse – assets can be transferred between spouses tax-free before disposing to utilise both exemptions.
• Contribute more to pensions – Pension contributions lower your taxable income, so more capital gains fall within exempt amounts.
• Invest in ISAs – gains from ISA investments are already sheltered from capital gains tax.

Everyone has an annual capital gains tax-exempt amount of £12,300 per individual in the 2022/23 tax year. Understanding this allowance is key to efficient tax planning. Smart investors utilise their full exempt amount each year by planning disposals across tax years, offsetting losses and making pension contributions. If gains exceed your exempt amount, a capital gains tax of 18% or 28% applies to the portion above the threshold.