Capital Gains Tax (CGT) is a tax on the profit made when you sell or dispose of an asset that has increased in value. It is the gain you make that is taxed, not the amount of money you receive. For example, if you bought a painting for £5,000 and sold it later for £25,000, you have made a gain of £20,000 (£25,000 minus £5,000). Some assets are tax-free, and you do not have to pay CGT if all your gains in a year are under your tax-free allowance.

The CGT allowance is the amount you can earn before paying CGT, and it is also known as the annual exempt amount (AEA). In the 2023/24 tax year, the CGT allowance is £6,000, which means that you can make gains up to this amount without paying any 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.

The amount of CGT you pay depends on your taxable income and the type of asset you are selling. If you are taxed at no more than the basic rate of tax on your total taxable income, you pay CGT at 10% (or 18% if the asset disposed of is a residential property) on any capital gains falling within the remaining basic rate band. If you have income taxable at the higher rate of 40% and/or the additional rate of 45%, your capital gains are taxed at 20% (or 28% if the asset disposed of is a residential property).

In summary, CGT is a tax on the profit made when you sell or dispose of an asset that has increased in value. The amount of CGT you pay depends on your taxable income and the type of asset you are selling. The CGT allowance is the amount you can earn before paying CGT, and it is also known as the annual exempt amount (AEA).