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UNDERSTANDING CAPITAL GAINS TAX

The tax paid on the profit of selling or disposing of an asset, which increases the value or capital, is referred to as Capital Gains Tax (CGT). It is the gain made that is taxed, not the total amount of money received. For example, Ben purchases an asset worth £5,000 and sells it later for £20,000. Thus, the gain made is the difference between the selling price and purchase price, i.e. £15,000. However, some assets are tax-free and there is no need to pay CGT. This applies if all the gains within a year are under the tax-free allowance limit. Disposing of an asset includes – selling it, giving the asset as a gift, or transferring the asset to someone else or receiving reimbursement for it.

Capital gain tax allowances and rates

Taxable items

Capital Gains Tax is payable on the disposal of:

  • Most personal belongings worth £6,000 or more, apart from a car; personal belongings may include:
    • Jewellery
    • Coins and stamps
    • Antiques
    • Paintings or other artworks
    • sets of things, e.g. a chess set
  • Property that isn’t the main home
  • The main home if let out or used for business
  • Business assets

CGT is not paid on gifts to a spouse, civil partner, or a charity. CGT is not paid on certain assets either, such as ISAs or PEPs, a win on a bet, Premium Bonds, UK government Gilts, or the lottery.

Overseas assets

Individuals must pay CGT even if the asset(s) is overseas. There are special rules for overseas assets capital gains.

FEATURES OF CAPITAL GAINS TAX

  • Up to 5 April 2016, disposals were taxed at the rate of 18%. This applies to gains where net total taxable gains and income is lower than the income tax basic rate band of £31,785 for 2015/16. Any capital gains above this limit will be charged at 28%.
  • From 6 April 2016, the higher rate of CGT will reduce from 28% to 20% and the basic rate from 18% to 10%. Few exceptions are considered in the Exceptions to the new CGT rates section.
  • Entrepreneurs’ Relief may be granted on certain business disposals.

WORKING OUT CAPITAL GAIN OR LOSS

The amount of CGT payable is computed automatically if an individual files an online self-assessment return. If an individual sends a paper tax return by 31 October, HMRC looks after the computation. Tax is charged on the total taxable gain after considering:

  • Certain costs and reliefs that can decrease the gain;
  • Allowable losses made on assets to which CGT applies;
  • If the gain is below £10,600, no tax is applicable – referred to as the Annual Exempt Amount.

Annual Exemption

Each tax year an individual is permitted to make gains up to the Annual Exemption without paying any tax. The Annual Exemption, for 2015/16 and 2016/17, is £11,100.

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