If you’ve invested in stocks and shares, you’ll probably have to hand over a proportion of any profits you make to HM Revenue and Customs when you sell them. So what are the rules on capital gains when you sell investments – find out.
That’s the bad news. The good news is that you’re allowed to make a certain amount of profit every year before you’re taxed on it. You don’t have learn endless tax rules off by heart to be a successful investor, but it definitely helps if you know the basics.
Capital gains tax when you sell investments
Capital gains tax is a tax that you pay when you sell certain assets. By assets I mean things such as shares or share-based funds and investment property as well as antiques or paintings. You don’t generally pay capital gains tax on your home (unless you own more than one). If you’re a basic rate taxpayer you’ll pay capital gains tax at a rate of 10%. You’ll pay it at 20% if you pay tax at 40% or a higher rate. If you’re selling a second property, the capital gains tax rates are 18% and 28%.
- You only pay capital gains tax when you get rid of an asset. You don’t have to pay the tax if your shares etc. rise in value as long as you still own them. It’s only when you sell or otherwise get rid of them that capital gains tax might come into the picture.
SAVVY TIP: In technical terms, you could face a capital gains tax bill when you ‘dispose’ of your assets. This means selling all or part of your investments (such as a number of shares you own or part of a plot of land) or giving them away.
You get a capital gains tax allowance every year. In the current tax year (2019-20) the capital gains tax allowance is £12,000. This means you can make this amount in profit in the current tax year from selling assets and you won’t have to pay capital gains tax.
Working out your profits
In theory it’s easy to work out how much profit you’ve made. It’s just the amount you receive when you sell the assets (or their market value if you give them away) minus the cost. But there are various things that can deducted as well; so if, for example, you were to sell a buy-to-let property, you could take away the following costs:
- Costs involved in buying the property (e.g. stamp duty)
- Costs involved in selling the property (e.g. estate agent’s fees)
- Costs of any improvements you made while you owned it (which could range from an extension to the cost of installing double glazing)
Do I have to pay capital gains tax on the rest?
No you don’t. You’re allowed to take away:
- An annual capital gains tax allowance, which is the amount of profit you’re allowed to make in a year before you have to pay the tax. It changes most years on April 6th (the start of a new tax year).
SAVVY TIP: You don’t have to pay capital gains tax if you sell or give away personal belongings worth less than £6,000. You also don’t have to pay capital gains tax if you sell your own car (even if it’s a vintage model) or your main home.
If I make a profit, do I have to tell HM Revenue & Customs?
The short answer is ‘yes’. However, if the amount of profit you make, once you’ve taken away the costs, is less than your annual capital gains tax allowance, you shouldn’t have to fill in a self-assessment return. Otherwise, you should contact HM Revenue & Customs and ask for the capital gains tax pages of a self assessment return.
Married couples and capital gains tax
If you give some shares or other investments to your husband, wife or civil partner, you don’t have to pay capital gains tax. It’s different if you give assets away to your boyfriend, girlfriend or other friend; in that case you’re not exempt from paying capital gains tax.
It would mean that if, for example, you owned some shares and you were planning to sell them at a profit of £18,000, you could give some to your husband, wife or civil partner so that each of you used up your capital gains tax allowance and there would be no tax to pay.
SAVVY TIP: It sounds obvious but once you’ve given something away, it’s no longer yours, so you lose control over it completely. It’s worth being aware of.
SavvyWoman email newsletters: If you found this information useful why not sign up now to receive free fortnightly email newsletters with money saving tips and help? You can sign up at the top of any page on the website and your details won’t be passed to any other company for marketing purposes.