Is Capital Gains to be Paid Separately from Income Tax?

Understanding capital gains tax and how it affects your finances is an important step in growing your net worth. As capital gains, as described by the HMRC, are “the profit when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value”, you need to prepare for the inevitable taxes that comes along with such activities.

How is my capital gains tax calculated? Do capital gains combine with my total taxable income? Is it necessary to pay capital gains tax separately from income tax? Are there exemptions or rule exceptions of significance when considering capital gains? The answer to these questions can make a noticeabledifference to your bottom line when it comes to tax time at the end of the year.

How is my capital gains tax calculated?

According to Amal from capital gains tax accountants, Accountingpreneur “Capital gains are the profits made from the sale or transfer of an asset.” To calculate the amount of tax you owe, you first need to know how much profit you made from the sale. To do this, add the original purchase cost of the asset, plus any other cost associated with buying and selling the asset, as well as any improvements you may have made. Deduct that from the sale price and what you have left is your profit.

Deduct from this profit any personal capital gains tax exemptions (£12,300 per year) and what you have left is the amount of “capital gains” you owe tax on.

Do capital gains combine with my other taxable income?

Yes. Your total capital gains, after exemptions and deductions, are added to your other taxable income although it is not taxed at the same rate as your other income. Your capital gains are considered income and they will add to your total taxable income for the calendar year, which determines your tax band. 

If you are a basic-rate taxpayer after you have added all your taxable income together (£37,700 or under), you will pay 10% on your capital gains (18% for residential property). If you are a higher-rate taxpayer, you will pay 20% (28% on property) on any amount over the basic rate.

Is it necessary to pay capital gains tax separately from income tax?

It depends. Income tax and capital gains taxes, even though they are combined to determine your total taxable income, are calculated separately and taxed at different rates. As of October 27, 2021, capital gains from residential properties that are sold need to be paid within 60 days of the asset changing hands. This is an increase from the previous deadline of 30 days. Other capital gains are simply added to your total taxable income and paid at the end of the year.

Are there exemptions or rule exceptions of significance when considering capital gains?

Absolutely. Understand the rules and exemptions that can have a material impact on your capital gains tax. This includes…

• Personal CGT allowance (£12,300)
• Certain business assets qualify for special rates
• If you are married or filing jointly, you can join your CGT allowances (£24,600)
• Deducting losses
• Wasting assets (with a life span of fewer than 50 years)