What is UK capital gains tax? Allowance rate, does it apply to property, how much is it going up by 2023

With a new tax year on the way, several key changes to our personal finances are coming in over the next week.

Alongside several utility bill hikes, including increases in council tax and water bills, most UK households will also be hit by changes to income tax thresholds. The tax on our salaries will remain frozen for most workers - an effective tax rise - while the highest earners will start paying much more to the Treasury.

One of the other tax hikes that is set to come in will apply to capital gains tax. The tax has been at the centre of two political storms over the last few months. The first involved ex-Chancellor of the Exchequer Nadhim Zahawi, who was forced to resign from Rishi Sunak’s cabinet after allegations emerged about his tax dealings and a dispute with HMRC while he was technically in charge of the public body under Boris Johnson.

The tax has since come to the fore again after the Prime Minister published his tax returns. They showed he paid an effective tax rate of 22% as most of his income had come through capital gains. Labour leader Sir Keir Starmer also paid the tax in one year of his published returns.

So, what is capital gains tax, who pays it - and how is it changing from April 2023?

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 in half once again 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 by the 2027/28 financial year, meaning the tax will provide £17.9 billion to the Treasury.

What did Nadhim Zahawi do?

Capital gains tax was at the centre of allegations faced by former Chancellor Nadhim Zahawi concerning his tax affairs. A Gibraltar-headquartered family trust reportedly connected to the Conservative Party MP (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.

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. It led to a dispute between the ex-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 all led to questions about what Zahawi knew and when, how transparent he has been on the issue, as well as whether he handled media enquiries in a way that’s healthy for democracy (he threatened journalists with legal action). The scandal also raised concerns about whether there was a conflict of interest during his time as Chancellor in Boris Johnson’s government, and how HMRC has conducted itself.

Ultimately, these questions became too politically toxic for Rishi Sunak, with Nadhim Zahawi forced to quit as Conservative Party chairperson in late January 2023. An inquiry by the PM’s ethics advisor Sir Laurie Magnus said Mr Zahawi’s actions amounted to a "serious failure to meet" ministerial standards.

What was in Rishi Sunak’s tax returns?

Capital gains tax made headlines once again in March after Sunak published his tax returns. He had pledged to do so after scandals about his wife’s non-dom tax status and him holding a US green card while serving as UK Chancellor led to heightened scrutiny of his family’s vast wealth during the Conservative leadership election in summer 2022.

In an apparent bid to bury the story, he released a document showing his tax bill rather than the actual return itself whilst Boris Johnson was in the middle of his marathon privileges committee evidence session. Sunak’s returns showed he had paid almost £745,000 to the Treasury in the form of capital gains tax over the three years to April 2022. The amount of money he earned from his capital gains stood at £3.76 million over this period.

After his other income was taken into account, he was shown to have paid an effective tax rate of 22% - only a fraction more than a basic rate taxpayer (i.e. someone earning £12,571 to £50,270) would pay in income tax. While there is no question of any wrongdoing with this arrangement, it has raised questions about the fairness of the current rate of capital gains tax in relation to employment taxes, including national insurance.

Speaking to Sky News, tax expert Dan Neidle said the PM paying an effective rate of 22% “not because he has done anything clever or because he is avoiding tax, it is because in this country we tax employment income at up to 47% but capital gains on investments at only 20%. That is why his effective rate is so low.”

He added: “Whether that is a fair result, whether the law should be like that, is a very good question. And, weirdly, Mr Sunak, who benefits from that low rate, is also the man who has the power to change it.”

In a separate comment to PA, Mr Neidle said: “[Capital gains tax] also distorts behaviour, with people structuring their arrangements to receive gains not income. That’s an undesirable way for a tax system to work.”

The official 10 Downing Street spokesperson said: “It is not unusual for savers to choose to put their investments in funds which focus on delivering long-term growth rather than short-term income generation.” They added that Sunak had paid a “considerable amount” in capital gains tax.

What was in Keir Starmer’s tax returns?

The Labour leader followed Rishi Sunak in publishing his tax returns. They showed he paid a much bigger proportion of his earnings in tax than the Prime Minister, at an effective tax rate of 33% on all of his earnings.

Sir Keir also paid capital gains tax, but only in the 2021/22 financial year. He made £85,466 in capital gains from the sale of a home he had helped his sister to purchase, paying £23,930 in capital gains tax as a result. Given it related to a property transaction, he paid a higher rate of 28%. He also did not use the allowance he was entitled to, which meant he paid an extra £3,500 in tax.