What is capital gains tax UK? Allowance rate, why Nadhim Zahawi was ‘in trouble’ with HMRC over YouGov shares

Chancellor of the Exchequer Jeremy Hunt altered the tax during the autumn budget, with allowance changes set to kick in from April 2023

Former Chancellor of the Exchequer Nadhim Zahawi is continuing to face calls to resign from Rishi Sunak’s government over allegations about his tax affairs.

The scandal relates to a row the Conservative Party chairperson had with HMRC over the amount of capital gains tax he should have paid when shares he reportedly held in the polling company he co-founded - YouGov - were sold. The Prime Minister has ordered an inquiry into the matter.

Capital gains tax is one of the many taxes the government changed in the Autumn Budget, as it sought to fill the major black hole in the UK’s public finances left by the Liz Truss administration. Zahawi’s successor as Chancellor Jeremy Hunt laid out plans to reduce the tax-free allowance over the next two years.

The current rate is in place until April 2023, and raises almost £16 billion a year for the Treasury. The changes, which are likely to affect higher earners more than basic rate tax payers, will increase this figure.

But what exactly is capital gains tax - and what is Nadhim Zahawi accused of doing?

Chancellor of the Exchequer Jeremy Hunt is reportedly considering a rise in capital gains tax (image: AFP/Getty Images)

What is capital gains tax UK?

Capital gains tax is the money you have to pay the government when you sell, gift or swap an asset that has increased in value. You only pay the tax on the profit you have made rather than on the overall amount of money you have received.

It applies when the following types of asset are sold:

  • Personal possessions worth £6,000 or above (except cars)
  • Property that’s not used as your primary residence
  • Your main home if: you’ve let it out, used it for business purposes or it’s a large property (5,000 square metres or more)
  • Shares not held in an ISA
  • Business assets
  • Some forms of cryptoasset, e.g. Bitcoin or NFTs

For higher earners a rate of 28% is charged on the property assets listed above - everything else has a rate of 20%. If you are a basic rate taxpayer (i.e. your income sits between £12,571 and £50,270 a year), you pay 18% on property assets and 10% on everything else.

To pay the tax, you have to report the gains you’ve made above the tax-free allowance threshold to HMRC. You have to do so within 60 days if it’s a property asset.

The above is a very basic introduction to capital gains tax. There are many additional rules and exceptions for the tax that relate to specific circumstances. If you wish to find out more, visit the government website.

How is capital gains tax changing?

Under the current rules, there is a tax-free allowance of £12,300 on capital gains (£6,150 for trusts) per year. So, any gains under that figure are not taxed, while any gains above that amount are. What you pay can also be reduced if you have gained on some things but made losses on others in a particular tax year.

But from April 2023, this allowance will be slashed by more than half to £6,000. And from April 2024, it will be cut yet further to £3,000.

While the allowance is going to see major changes, the rates you pay depending on your income tax status will remain the same. The Office for Budget Responsibility (OBR) forecasts that these alterations will allow the Treasury to raise an additional £2 billion a year (£17.9 billion) by the 2027/28 financial year.

What did Nadhim Zahawi do?

Capital gains tax is at the centre of the allegations currently being faced by former Chancellor Nadhim Zahawi.

A Gibraltar-headquartered family trust reportedly connected to the serving Conservative Party chair (Zahawi denies he is, or has been, a beneficiary of it) - Balshore Investments - sold a tranche of shares in the polling company YouGov, which Zahawi co-founded in 2000. Worth around £20 million, the capital gains on the shares should have led to £3.7 million going to the taxman.

Nadhim Zahawi is facing calls to resign over his tax affairs (image: AFP/Getty Images)

But, in an error Zahawi said was deemed by HMRC to be “careless and not deliberate” and related to founder shares he says were held by his father, this tax was not paid. This led to a dispute between the Tory minister and the UK tax agency, which resulted in what the Guardian reports was a £4.8 million settlement in December 2022 - the £3.7 million plus a £1.1 million penalty. Zahawi has only confirmed that he paid an unspecified sum to settle the case.

It has led to questions about what Zahawi knew and when, as well as how transparent he has been on the issue. It has also raised concerns about whether there was a conflict of interest during his time as Chancellor in Boris Johnson’s government.