2025 Capital Gains Explained: What Investors Need to Know
Capital gains tax is levied on the profit from the sale of non-inventory assets held longer than a year, calculated as the difference between the purchase price and the selling price of the asset.
What Is Capital Gains Tax and How Is It Explained? Find Out How It Works, What to Avoid & Why You MUST KNOW THIS...
This article contains tops tips from our experts, backed by in-depth research.
Katherine Read Is a Financial Writer Known for Her Work on Financial Planning and Retirement Finance, Covering Equity Release, Lifetime Mortgages, Home Reversion, Retirement Planning, SIPPs, Pension Drawdown, and Interest-Only Mortgages.
Bert Hofhuis Is a Founder & Entrepreneur Simplifying the Complexities of Later Life Planning. He Navigates the Intricacies of Equity Release, Lifetime Mortgages, Reverse Mortgages, and Wealth Management With Clarity and Expertise.
Paul Is an External Compliance Expert and the Director of Alpha Capital Compliance Limited, Known for Its No-Nonsense Approach to Financial Compliance. With Expertise in Regulatory Updates, Compliance Auditing, and Due Diligence, Paul Is a Trusted Name in UK Finance.
Francis Hui Is Senior Risk Manager With a Wealth of High-Level Experience Across the Industry, and a True Expert at Helping UK Citizens Make Smart Financial Decisions and Manage Risk.
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Key Takeaways
Capital Gains Tax (CGT) is a tax on the profit when you sell something that's increased in value, with the exact amount determined by the gain's size and your taxable income.
With equity release, you typically won't be impacted as the property remains your main residence.
Current rates in the UK are 10% for basic rate taxpayers and 20% for higher or additional rate taxpayers, with residential properties taxed at 18% and 28% respectively.
Several exemptions include the sale of your main home, personal belongings worth £6,000 or less, and gifts to your spouse, civil partner, or charity.
Minimising this tax on your property sale can be achieved by utilizing your annual exemption, selling assets in a lower income year, or offsetting losses against gains.
You could be earning money right now and not even know it - that's if you need to have capital gains explained.
If you’re a homeowner, you’ll want to have the best knowledge on how to get the most out of your property investment.
That's why fully understanding capital gains is vital.
In This Article, You Will Discover:
As experts in the field of equity release, we’ve spent countless hours studying the market. Now, let’s find out precisely what capital gains are.
Let's get into it...
What Are Capital Gains?
Capital gains are the profit you make on an asset or investment at the time of its sale.1
The difference between the purchase and sale price is the capital gain.
On the other hand, if the purchase price is higher than the sale price, that would be a capital loss.
While capital gains can relate to several products, we’ll look at them in relation to property for this article.
Understanding Depreciating vs. Appreciating Assets
When considering capital gains, it’s essential to differentiate between depreciating and appreciating assets.
Appreciating assets, such as real estate, tend to increase in value over time, leading to potential capital gains when sold.
On the other hand, depreciating assets, like cars or certain electronics, usually lose value as they age.
When planning your investments or considering equity release, focusing on appreciating assets can help maximize your potential gains and ensure a more secure financial future.
Your equity release plan means that you are taking out a loan against the value of your estate.
Therefore, no capital gains will be owed against your estate, even if there's an increase in value.
How Do Capital Gains Work With Equity Release?
The capital gains on your home will help cover some of the interest owed to your provider when you pass away or move into long-term care.
Unless there’s an economic crash, homes are typically appreciating assets.4 On average, the price of property in the UK rises by 8% annually.5
Therefore, when your house is sold, there could be a massive capital gain on its value.
Impact of Capital Gains on Estate Planning
Capital gains can significantly impact your estate planning decisions.
As assets like property typically appreciate over time, the capital gains realized upon their sale can increase the overall value of your estate.
Understanding how capital gains interact with taxes and equity release options is crucial for efficient estate planning.
By anticipating these gains, you can better plan for potential tax implications and ensure that your beneficiaries receive the maximum value from your estate.
This foresight can also help in making informed decisions about when to sell assets or release equity, ensuring that your financial legacy is optimized.
Common Questions
Do You Pay Capital Gains Tax on Equity Release Mortgages?
No, you do not pay capital gains tax on equity release mortgages.
The funds received from releasing equity are a loan, not capital gains.
Are There Any Exemptions to Capital Gains Tax?
Yes, there are certain exemptions to capital gains tax in the UK.
Most personal belongings worth £6,000 or less, your main home if you have always lived in it, and assets held in tax-free savings or investment accounts like ISAs and PEPs are exempt.
Additionally, the sale of a business you own or part own, certain shares in employee share schemes, and winnings from betting are also exempt from capital gains tax.
Do You Pay Capital Gains Tax When Selling an Asset You Jointly Own With Somebody Else?
Yes, you do pay capital gains tax when selling an asset you jointly own with somebody else, if it meets the threshold.
The CGT you pay is on the portion of the asset that you own.
What Is Capital Gains Tax and How Is It Calculated?
Capital Gains Tax (CGT) in the UK is a tax levied on profits from the sale of an asset, which can include properties.
The calculation is based on the difference between the purchase price and the selling price of the asset, less any allowable deductions such as fees and enhancement costs.
The capital gains tax rate is determined by your income tax band: 10% for basic rate taxpayers and 20% for higher or additional rate taxpayers.
However, if the asset is residential property, the rates increase to 18% and 28% respectively.
Do I Have to Pay Capital Gains Tax Immediately?
You’ll be required to report and pay the first instalment of capital gains tax within 30 days of the sale of your property.6
How Much Tax Do I Pay on Capital Gains?
The amount you’ll pay on capital gains will depend on whether you pay basic or higher-rate income tax.
Residential property gains are taxed at 28% for higher rate taxpayers, while capital gains from other qualifying assets are taxed at 20%.7
Basic taxpayers pay rates based on their taxable income, gain size and whether their gain comes from residential property.
You’ll pay 10% tax on this gain if it falls within the basic Income Tax band (or 18% if the gain relates to residential property).
All amounts above the basic tax rate will be subject to a 20% tax (or a 28% tax on residential property).
Does Capital Gain Count as Income?
Contrary to wages or salaries, which are taxed whenever they are earned, capital gains are taxed only when they are sold and a profit is made.
Do I Have to Pay Capital Gains If I Sell My House and Buy Another?
No, you do not have to pay capital gains tax on your property, provided all of the below apply:8
It’s the only home you own and it’s been your main residence for the duration or ownership.
You have not rented out any part of your home (lodgers are not counted here).
You haven’t used your home or for business.
The grounds your property is on is less than 5,000sqm.
You didn’t buy your property in order to profit from the sale thereof.
At What Age Do You Not Pay Capital Gains?
You will be required to pay capital gains tax into your senior years if it applies to your circumstances.
There is no age limit.
Do People over 70 Pay Capital Gains?
Yes, people over 70 pay capital gains tax if their circumstances require them to do so. There’s no age-related exemption for capital gains.9
How Does Capital Gains Tax Impact My Equity Release?
Equity release in the UK allows you to unlock the value of your property without having to move.
It’s important to know that the released equity is not subject to capital gains tax as it’s not a sale of an asset.
However, if you decide to sell your home after equity release, any profit you make (over your tax-free allowance) could potentially be subject to capital gains tax, depending on your personal circumstances and tax status.
What Are the Current Capital Gains Tax Rates in the UK?
The current capital gains tax rates in the UK depend on your income tax band and the type of asset sold.
For basic rate taxpayers, the tax is 10% on assets and 18% on residential property.
For higher or additional rate taxpayers, the rates increase to 20% on assets and 28% on residential property.
However, everyone has an annual tax-free allowance, called the Annual Exempt Amount, which for the 2021-22 tax year is £12,300.
How Can I Minimize Capital Gains Tax on My Property Sale?
To minimize capital gains tax on your property sale, you could use your tax-free allowance, which is £12,300 for the 2021-22 tax year.
You might also consider transferring assets to your spouse or civil partner, as they also have their own tax-free allowance.
Another way to reduce the tax is by offsetting losses from previous years against the profit from your sale.
Lastly, consider any reliefs you may be eligible for, such as Private Residence Relief if you’re selling your home.
In Conclusion
Whenever you purchase an asset, you must always consider what the capital gains could be.
Try your best to avoid depreciating assets unless they’re necessities.
Understanding what capital gains are could put you at an advantage looking to release equity, should you decide to pursue that route.
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