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capital gains tax – explained guide image

capital gains tax – explained


Capital Gains Tax is a tax on the gain or profit you make when you sell, transfer assets or otherwise dispose of something. It applies to assets that you own, such as shares or property. There’s a tax-free allowance and some additional reliefs that may reduce your Capital Gains Tax bill. Sometimes you may have no tax to pay.

It’s the gain you make – not the amount of money you receive for the asset – that’s taxed.

Example

You bought some shares for £2,500 in June 1995.

You sell them for £14,500 in May 2012.

You’ve made a gain of £12,000 (£14,500 less £2,500).

Then you can deduct your annual tax-free allowance- currently £10,600

So you net taxable gain will be £1,400 (£12,000 less £10,600)

Of course, you won’t always make a profit when you sell. Sometimes you will lose money – that’s called a capital gains loss, and unfortunately you don’t get money back from the government for losing money. However, you can offset capital gains with capital losses to reduce the total gain you will pay tax on.

How capital gains tax works

Like income tax, capital gains tax is calculated on the basis of the tax year, which runs from 6 April to 5 April the following year. CGT is paid on the total taxable gains you make selling assets in that tax year, after taking into account:

  • Costs or reliefs that can reduce or defer the gains.
  • Allowable losses you made by selling assets that would normally be liable for CGT. (The opposite of a capital gain, in other words). If your total gains, minus these deductions, comes to more than your annual allowance – currently £10,600 – then you pay tax on everything over that tax-free allowance.

Basic rate taxpayers pay CGT at 18%. Higher rate taxpayers pay 28%.

Which rate you’ll pay normally depends on your total taxable income. To work this out, your capital gain is added to your taxable income from normal sources (salary, dividends, savings interest, and so forth). So you might normally be a basic rate taxpayer, but have to pay a higher rate on your capital gain if it’s large enough to move you into the higher rate bracket.

This can all get a bit complicated – Contact a Taxeezy advisor for more help.

What’s it charged on and when?

The good news is in the UK capital gains tax is a fairly avoidable tax for most investors. (Remember, you’re allowed to avoid paying taxes where possible, but tax evasion is illegal.)

Most capital gains on asset sales are taxable, but in the UK capital gains tax is NOT charged on these assets:

  • Your main home (in 99% of cases)
  • UK Government bonds (gilts)
  • ISA holdings
  • Personal belongings worth £6,000 or less when you sell them
  • Betting, lottery or pools winnings (including spreadbets)
  • Money which forms part of your income for Income Tax purposes
  • Venture Capital Trusts
  • Certain business holdings that qualify for entrepreneur’s relief.

Capital Gains tax can be complex but we are here to help you if you need it.

Taxeezy Online Tax Return Service

Completing your Tax Return correctly, particularly when non-resident, is not an easy task and also can be very time consuming. For only £130 we can complete and file your Tax Return for you and ensure you claim all the allowable expenses and reliefs you are entitled to (Tax Treaty Claims and Capital Gains are subject to a £25 surcharge), saving you tax. Simply provide us with the information we ask for then leave the rest to us.

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