Capital Gains and Inheritance Tax

5 Apr 2022

Capital Gains and Inheritance Tax and Rates 2022 /2023

Capital Gains Tax

Capital Gains Tax is a tax on the profit 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.

ExampleYou bought a painting for £5,000 and sold it later for £25,000. This means you made a gain of £20,000 (£25,000 minus £5,000).

Disposing of an asset

Disposing of an asset includes:

selling it
giving it away as a gift, or transferring it to someone else
swapping it for something else
getting compensation for it - like an insurance payout if it’s been lost or destroyed

You only pay CGT on amounts above your Tax Free Allowance which = £12,300

You pay Capital Gains Tax on the gain when you sell (or dispose of )

most personal possessions worth £6,000 or more, apart from your car unless used for business
property that’s not your main home including second properties and buy to lets
your main home if you’ve let it out, used it for business or it’s very large
any shares that are not in an ISA or PEP
business assets

You do not usually pay tax when you sell your home.

Capital Gains Tax Rates

You pay a different rate of tax on gains from residential property than you do on other assets.

Basic Rate Tax Payer:

10% CGT on Assets other than Residential Property
18% CGT on Residential Property

Higher Rate Tax Payer

20% CGT on Assets other than Residential Property
28% CGT on Residential Property

If you pay Basic Rate Income Tax

If you’re a basic rate taxpayer, the rate you pay depends on the size of your gain, your taxable income and whether your gain is from residential property or other assets.

Work out how much taxable income you have - this is your income minus your Personal Allowance and any other Income Tax reliefs you’re entitled to.
Work out your total taxable gains.
Deduct your tax-free allowance from your total taxable gains.
Add this amount to your taxable income.
If this amount is within the basic Income Tax band you’ll pay 10% on your gains (or 18% on residential property). You’ll pay 20% (or 28% on residential property) on any amount above the basic tax rate.

Example

Your taxable income (your income minus your Personal Allowance and any Income Tax reliefs) is £20,000 and your taxable gains are £12,600. Your gains are not from residential property. First, deduct the Capital Gains tax-free allowance from your taxable gain. For the 2021 to 2022 tax year the allowance is £12,300, which leaves £300 to pay tax on. Add this to your taxable income. Because the combined amount of £20,300 is less than £37,700 (the basic rate band for the 2021 to 2022 tax year), you pay Capital Gains Tax at 10%. This means you’ll pay £30 in Capital Gains Tax.

If you have gains from both residential property and other assets

You can use your tax-free allowance against the gains that would be charged at the highest rates (for example where you would pay 28% tax).

If you're a Trustee or Business

Trustees or personal representatives of someone who’s died pay:

28% on residential property
20% on other chargeable assets

You’ll pay 10% if you’re a sole trader or partnership and your gains qualify for Business Asset Disposal Relief.

Inheritance Tax

Inheritance Tax is a tax on the estate (the property, money and possessions) of someone who’s died.

There’s normally no Inheritance Tax to pay if either:

the value of your estate is below the £325,000 threshold
you leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club

Note the value of your estate still needs to be reported even if it is below the threshold.

Passing on a home

You can pass a home to your husband, wife or civil partner when you die. There’s no Inheritance Tax to pay if you do this. If you leave the home to another person in your will, it counts towards the value of the estate. If you own your home (or a share in it) your tax-free threshold can increase to £500,000 if:

you leave it to your children (including adopted, foster or stepchildren) or grandchildren
your estate is worth less than £2 million

Giving away a home before you die There’s normally no Inheritance Tax to pay if you move out and live for another 7 years. If you want to continue living in your property after giving it away, you’ll need to:

pay rent to the new owner at the going rate (for similar local rental properties)
pay your share of the bills
live there for at least 7 years

You do not have to pay rent to the new owners if both the following apply:

you only give away part of your property
the new owners also live at the property

If you die within 7 years

If you die within 7 years of giving away all or part of your property, your home will be treated as a gift and the 7 year rule applies.

Gifts

Inheritance Tax may have to be paid after your death on some gifts you’ve given. Gifts given less than 7 years before you die may be taxed depending on:

who you give the gift to and their relationship to you
the value of the gift
when the gift was given

What counts as a gift

Gifts include:

money
household and personal goods, for example, furniture, jewellery or antiques
a house, land or buildings
stocks and shares listed on the London Stock Exchange
unlisted shares you held for less than 2 years before your death

A gift can also include any money you lose when you sell something for less than it’s worth. For example, if you sell your house to your child for less than its market value, the difference in value counts as a gift.

Who does not pay Inheritance Tax

Some gifts are exempt from Inheritance Tax. There’s no Inheritance Tax to pay on gifts between spouses or civil partners. You can give them as much as you like during your lifetime, as long as they:

live in the UK permanently
are legally married or in a civil partnership with you

There’s also no Inheritance Tax to pay on any gifts you give to charities or political parties.

Using allowances to give tax free gifts

Each tax year, you can also give away some money or possessions free of Inheritance Tax. How much is tax free depends on which allowances you use.

Annual exemption

You can give away a total of £3,000 worth of gifts each tax year without them being added to the value of your estate. This is known as your ‘annual exemption’. You can give gifts or money up to £3,000 to one person or split the £3,000 between several people. You can carry any unused annual exemption forward to the next tax year - but only for one tax year.

The tax year runs from 6 April to 5 April the following year.

Example

In the 2019 to 2020 tax year, Mark gave £2,000 to his daughter Jane. If he died within 7 years of the gift, this would use £2,000 of his annual exemption.

In the following 2020 to 2021 tax year, Mark gave £4,000 to his other daughter Sarah. If Mark died within 7 years of the gift, this would use his annual exemption of £3,000 plus the £1,000 of annual exemption left over from the previous tax year.

Even if Mark dies within 7 years of giving these gifts, there’s no Inheritance Tax to pay.

Small gift allowance

You can give as many gifts of up to £250 per person as you want each tax year, as long as you have not used another allowance on the same person.

Birthday or Christmas gifts you give from your regular income are exempt from Inheritance Tax.

Gifts for weddings or civil partnerships

Each tax year, you can give a tax free gift to someone who is getting married or starting a civil partnership. You can give up to:

£5,000 to a child
£2,500 to a grandchild or great-grandchild
£1,000 to any other person

If you’re giving gifts to the same person, you can combine a wedding gift allowance with any other allowance, except for the small gift allowance.

For example, you can give your child a wedding gift of £5,000 as well as £3,000 using your annual exemption in the same tax year. If you make regular payments

You can make regular payments to help with another person’s living costs. There’s no limit to how much you can give tax free, as long as:

you can afford the payments after meeting your usual living costs
you pay from your regular monthly income

These are known as ‘normal expenditure out of income’. They include:

paying rent for your child
paying into a savings account for a child under 18
giving financial support to an elderly relative

If you’re giving gifts to the same person, you can combine ‘normal expenditure out of income’ with any other allowance, except for the small gift allowance.

For example, you can give your child a regular payment of £60 a month (a total of £720 a year) as well as using your annual exemption of £3,000 in the same tax year.

The 7 year rule

No tax is due on any gifts you give if you live for 7 years after giving them - unless the gift is part of a trust. This is known as the 7 year rule.

If you die within 7 years of giving a gift and there’s Inheritance Tax to pay, the amount of tax due depends on when you gave it.

Gifts given in the 3 years before your death are taxed at 40%.

Gifts given 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’.

Taper relief

Years between gift and death

Rate of tax on the gift

3 to 4 years 32%

4 to 5 years 24%

5 to 6 years 16%

6 to 7 years 8%

7 or more 0 %

Giving gifts you still benefit from

If you give something away but still benefit from it (a ‘gift with reservation’), it will count towards the value of your estate. Gifts with reservation include:

giving your home to a relative but still living there
giving away a caravan but still using it for free for your holidays
giving away a valuable painting but still displaying it in your house

Keeping records of gifts you’ve given

The person who deals with your estate will need to work out what gifts you gave in the 7 years before your death. You should keep the following records:

what you gave and who you gave it to
the value of the gift
when you gave it

How Inheritance Tax on a gift is paid

Any Inheritance Tax due on gifts is usually paid by the estate, unless you give away more than £325,000 in gifts in the 7 years before your death.

Once you’ve given away more than £325,000, anyone who gets a gift from you in those 7 years will have to pay Inheritance Tax on their gift.

Example Sally died on 1 July 2018. She was not married or in a civil partnership when she died. She gave 3 gifts in the 9 years before her death:

£50,000 to her brother 9 years before her death
£325,000 to her sister 4 years and 2 months before her death
£100,000 to her friend 3 years before her death

There’s no Inheritance Tax to pay on the £50,000 gift to her brother as it was given more than 7 years before she died.

There’s also no Inheritance Tax to pay on the £325,000 she gave her sister, as this is within the Inheritance Tax threshold.

But her friend must pay Inheritance Tax on her £100,000 gift at a rate of 32%, as it’s above the tax-free threshold and was given 3 years before Sally died. The Inheritance Tax due is £32,000.

Sally’s remaining estate was valued at £400,000, so the estate would pay Inheritance Tax of 40% on £400,000 (£160,000).