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Capital Gains Tax

Capital Gains Tax

What is Capital Gains Tax?

Sole traders are also subject to Capital Gains Tax (CGT).

CGT is a tax charged on the profit or gain you make when you 'dispose of' an asset, e.g. if you sell it or give it away as a gift.

It's the gain you make that's taxed, not the sale price.

Most assets are liable to CGT when you dispose of them. This includes shares, property, business assets and personal possessions, whether they're in the UK or overseas. But some assets are exempt.

Exempt assets

Exempt assets include:

  • your car
  • personal injury compensation
  • betting, lottery or pools winnings
  • stocks and shares in tax-free investment savings accounts, e.g. ISAs and PEPs
  • personal possessions worth up to £6,000 each, e.g. jewellery, paintings or antiques
  • UK government or 'gilt-edged' securities, e.g. National Savings Certificates, Premium Bonds and loan stock issued by the Treasury
  • any foreign currency held for your own or your family's personal use outside the UK (e.g. if you've made a gain because of a change to the exchange rate)

Working out your gain

To work out your gain, take the sale price of the asset and deduct:

  • cost of the asset;
  • any incidental costs of sale and purchase (such as solicitors' fees, real estate agents' fees and stamp duty land tax); and
  • any costs of permanent improvements.

For example, if you sell a property in January 2021:

Sale price of property

£350,000

Less costs of sale

£5,000

Less purchase price

£175,000

Less costs of purchase

£2,200

Less cost of extension

£20,000

Gain£147,800

The annual tax-free allowance

YYou have an annual tax-free allowance for CGT known as the 'Annual Exempt Amount' (AEA). The AEA normally increases each tax year (April-April). It's £12,300 for individuals and £6,150 for most trustees for the tax years 2021-22 to 2025-26.

If your overall gains for the tax year are above this, you'll pay CGT on the excess.

If your overall gains are below the AEA, you won't pay CGT.

The rate of Capital Gains Tax

There are 4 rates of CGT that apply to sole traders: 10% if your income is within the basic tax band rate; 20% if your income is above that; except disposals of residential property which are taxed at 18% and 28%. (For disposals before April 2016, all Capital Gains Tax was 18% or 28%.) You can read more about CGT calculations on the HM Revenue & Customs' website.

Example

You sell residential property in January 2023 and make a gain of £147,800. In addition, you:

  • sell no other assets for the tax year;
  • have no losses from previous tax years;
  • have no reliefs available (see Reliefs from Capital Gains Tax); and
  • are a higher rate taxpayer.

Your CGT would be calculated as follows:

Gain

£147,800

Less AEA (Tax year 22/23)

£(12,300)

Taxable gain

£135,500

CGT at 28%£37,940

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