MANY of us are more than familiar with the basics of income tax and how to keep our overall liability down. Capital Gains Tax (CGT), however, is often overlooked and it is vitally important to get to grips with how this tax is calculated and the steps you can take to make the most of the allowances available to you.
Put simply, CGT is a tax on the gain or profit you make when you sell, give away or otherwise dispose of something. It applies to assets that you own, such as shares or property.
Luckily, there’s a taxfree allowance and some additional reliefs that may reduce your CGT bill. In certain scenarios you may have no tax to pay, even where there is a gain.
The tax is potentially liable on the profit or gain you make when you sell or “dispose of ” an asset.
You usually dispose of an asset when you cease to own it; for example if you:
- sell it,
- give it away,
- transfer it to someone else,
- exchange it for something else.
- receive compensation for it – for example you receive an insurance payout when an asset has been destroyed.
It’s important to remember that it is the gain you make – not the amount of money you receive for the asset – that’s taxed.
For example: Lloyd bought some shares for £3,500 in June 1991; he sells them for £13,500 in May 2012; so he has made a gain of £10,000 (£13,500 less £3,500).
Most assets are liable to CGT when you sell or dispose of them. For UK residents this applies whether they’re held or based in the UK or overseas.
Some assets, however, are exempt, such as your car, personal possessions disposed of for £6,000 or less (chattels) and, usually, your main home.
Many events can lead to a gain or loss, besides the obvious one of selling an asset. A gain may sometimes occur when you least expect it.
For instance, making a gift to a child – or to other individuals or companies – is a “disposal” for CGT purposes. You’ll need to perform some calculations to work out if the tax is due on the gift being made.
However, making a gift to a spouse, civil partner or charity usually won’t lead to CGT.
If you inherit an asset, for example a property, then it’s not liable to CGT until you sell or dispose of it. You’ll usually need to get a valuation of the asset at the date of death to work out the capital gain or loss.
It is also worth noting that when you divorce, separate or dissolve a civil partnership, you may end up transferring assets between the two parties in line with the financial resolutions made. These are disposals for CGT purposes. Whether you’re liable depends on the date of transfer and whether you’re living together at the time.
How to calculate your gains or losses
When you sell or dispose of an asset, you need to work out the gain or loss on each asset separately. You are able to include any allowable costs associated with acquiring or disposing of the asset, and apply any tax reliefs available.
Once the first step has been completed you will need to bring all the individual gains and losses together to work out the gain or loss for the tax year and the amount of tax due.
If you’ve got unused losses from earlier years – and have claimed them in time – you may be able to deduct them too.
You only have to pay CGT if you have overall gains above the annual taxfree allowance (see below).
The annual tax-free allowance
Individuals have an annual tax-free allowance for CGT known as the “annual exempt amount”. For the tax year 2013-14 this is £10,900 for each individual, £5,300 for most trustees.
If your overall gains for the tax year are above the annual exempt amount, you’ll pay CGT on the excess. However, if your overall gains are below it, you won’t pay the tax.
Rates of tax on capital gains
In the event of a chargeable gain, then tax will be due at the following rates (for 2013-14):
- 18% and 28% for individuals (the tax rate you use depends on the total amount of your taxable income and gains for the tax year of assessment);
- 28% for trustees or personal representatives,
- 10% for gains qualifying for Entrepreneurs’ Relief.
Once you’ve worked out that you have CGT to pay, or a loss to claim, you must report it. If you haven’t received a tax return or letter asking you to complete a tax return, you will need to contact HMRC.
If you normally complete a selfassessment tax return, you need to check if your gains need reporting. If you have gains to report or a loss to claim, you’ll need to complete the additional CGT pages with the return.
This article is intended as a basic overview of current CGT legislation and the situations in which a tax liability may occur.
As with all elements of UK taxation, it is imperative that all gains and losses are fully detailed and declared to the relevant authority.
If you do feel you have a potential liability then it is always sensible to seek professional advice as there may be ways in which to reduce and minimise the amount of tax payable.
