Capital Gains Tax

What is capital gains tax (CGT)?

Capital Gains Tax is the Tax charged by the government on gains people make when they sell different sorts of assets. The amount of gain is calculated as the sale proceeds, less the cost of the asset, less any improvements you've make to it while you owned it, less the costs of disposal. When you've got to that gain figure, it's reduced further by something called taper relief, which reduces the effective rate of tax, according to how long you've owned the asset. You get a better taper relief for business assets, things used in a business, or shares of a business company, than you do for other assets.

Why might I be liable to pay capital gains tax?

If you are a resident in the UK, or what's called 'ordinarily resident' in the UK, and you sell something called a 'chargeable asset', then you will be liable to capital gains tax if you've made a gain on the sale. A 'chargeable asset' might, for example, include an investment property, or stocks and shares. It can be a very wide range of things.

What assets are subject to capital gains tax?

An enormously wide range of assets are subject to capital gains tax. Investments properties, stocks and shares, all sorts of other assets.

What assets are not subject to capital gains tax?

The assets which are not subject to capital gains tax are obviously very interesting, because if when you sell them you make a gain, that gain isn't going to be charged to capital gains tax. Treasury bonds, 'gilts' as they're called, ISA accounts, foreign currency that you've got for your own use, premium bonds, your own home, your main residence: all of those are exempted from capital gains tax. There are also other exceptions for what are called 'chattels', things like works of art or antiques worth less than six thousand pounds and also movable chattels: things like motorcars, yachts, and so on, with a life expectancy of less than 50 years.

Is there a limit to the amount I can earn without having to pay capital gains tax?

The amount you earn, income, doesn't affect the amount of tax you pay on capital gains. However, your taxable capital gains and your taxable income are added together when working out the rate of tax you pay on your combined income and gains.

How is capital gains tax calculated?

Capital gains tax calculations look at a number of factors. The most important is the amount that you received when you sold the chargeable asset. From that, you deduct the purchase price, you deduct the cost of any improvements which were reflected in the state of the asset when you sold it and you deduct the dealing costs of buying and selling the asset. That gives you a figure of gain. You don't have to pay tax on the whole gain. The gain is reduced by something called "taper relief", which reduces the proportion of the taxable gain. If we're looking at a business asset- an asset used in a business or shares in a qualifying company - if you've owned that asset, for example, for two years, then the amount of the taxable gain will be reduced by seventy-five percent. That means that the maximum effective tax rate is reduced by seventy percent, so on current figures the maximum effective tax rate would reduce from forty percent to ten percent. Obviously the figures would be lower if you weren't a top-rate tax payer. For non-business assets, the taper relief is less generous and takes longer to earn. The maximum taper relief is forty percent, and that is only available after ten years of ownership.

What are the rates for capital gains tax?

Capital gains tax will be payable at either 22% or 40%, according to the amount of your total income and gains.

What happens if I sell an asset?

When you sell an asset, if it's what is called a chargeable asset, an asset on which capital gains tax might be payable, you have to do a calculation. You take away from the sale price the cost that you paid for it, any improvements that you made, which were reflected in the state of the asset when you sold it, and the cost at sale. If you get a positive figure, you've got a gain. That gain has to be shown on your tax return, and a taxable figure worked out. You may make a loss. If you've made a loss, then you might be able to carry that forward, or use it against other gains in the same year.

What happens if I give an asset away?

If you give an asset away, it's treated by HM Revenue and Customs as a disposal. So, if you give it away to a third party individual then you will be treated as having disposed of it at the then market value. There are some valuable exemptions, however. For example, husbands and wives can gift assets to each other without crystallizing a capital gain. you can also make gifts to charity without crystallizing a capital gain.

What happens if I have inherited an asset?

When you inherit an asset, you will receive the asset with a capital gains taxed based cost as it's called, and that base cost will be the value of the asset at the date that the deceased person died. You will take it at the probate value, effectively for capital gains purposes.

Can I transfer an asset to a spouse without incurring capital gains tax?

Yes, you can. There are valuable exemptions here. Broadly, husbands and wives can give assets to each other without incurring capital gains tax charge and the same applies to people in registered civil partnerships.

Can I give an asset to charity without incurring capital gains tax?

Yes, the government's keen to encourage charitable giving, so if you give an asset to charity then you pay no capital gains tax on the value of the gift. Many charities are now well organized to receive gifts, and to sell them to realize the proceeds for the benefit of the charity. Sometimes it's worth doing the calculation to see whether it would be better from your tax point of view to sell the asset and give the proceeds to the charity. So it's always worth just checking the best way of making that beneficial gift to the charity