Identifying assets with possible lower CGT rates

Meg Saksida outlines two instances when individuals can get the lower capital gains tax rate on a disposal. 

Although currently, we have a two-tiered capital gains tax (CGT) rate level with 18% and 28% for residential property and 10% and 20% for all other assets, the percentage charge for CGT has historically been much higher. From the inception of the CGT regime up until the late 1980s, CGT rates were a substantial 30%. They were then increased to be in sync with the top rate of income tax at a whopping 40% for the next 20 years from 1988 up until 2008.  

Entrepreneurs’ relief (now business asset disposal relief (BADR)) was indeed a breath of fresh air for business owners when it was introduced in 2008 at the low rate of 10%. Although ER (or BADR) has gone through a few iterations since its introduction, it is substantially still the same percentage (10%) and is only available on the disposal of all or part of a business that has been held for at least two years. 

If the asset is not a business asset taxable under the BADR regime, taxpayers will generally prefer to pay CGT at the lower rates of 18% on residential property and 10% on all other assets. However, the issue is that without BADR, these lower rates can only be obtained in very limited circumstances: namely, if the individual has capacity in the basic rate band for income tax purposes. 

Capacity in the income tax basic rate band 

The ability to be taxed at the lower rate (on any asset) is only available if the individual has capacity in the basic rate band for income tax purposes. This is a difficult concept to understand, as although we are concentrating on the taxation of a capital gain, we are seeking to establish the rate of the charge by looking at the level of the taxpayer’s income tax.  

Broadly, the process is that the CGT rate will depend on the level of the unused capacity of the income tax basic rate band. To the extent that there is an amount available in the income tax computation that could be taxed at the lower rate (if more income was earned in that tax year), this capacity can be ‘borrowed’ by the CGT regime and that amount of the capital gain can be taxed at the lower rate. 

Example: Lower CGT rate 

Molly sold a buy-to-let residential property in 2022/23 and made a gain of £200,000 after the annual exempt amount. Molly earned £25,000 in her role as a doctor’s receptionist and had £1,500 of interest income.  

As Molly can benefit from the personal allowance, she would have taxable income of £13,930 (£25,000 + £1,500 – personal allowance of £12,570). As the basic rate band extends to £37,700 in 2022/23, Molly has the capacity to earn another £23,770 and still be charged inside the basic rate before she enters into the 40% tax bracket (the higher rate band). This capacity can be used (or ‘borrowed’) by her CGT charge such that £23,770 will be charged at 18% and the balance of her gain of £176,230 will be charged at 28%. The total CGT payable will thus be: 

Practical tip 

Taxpayers would be well advised to dispose of assets carrying a gain in years when they have lower income, such that any capacity in the income tax basic rate bands can be used for the capital gain.