If you’ve recently sold or disposed of an asset, and you’ve made a profit, it’s probably wise to take a look at the capital gains tax (CGT) law – because you’ll almost certainly need to pay it.
What is capital gains tax?
CGT is, essentially, a tax on profit. If you’ve bought shares at a low price and sold high, bought a cheap property, done it up and sold it on, or exited your business for a large fee, this will apply to you.
The tax can also apply to gifts; if you’re a landlord and one of your properties has increased in value, you’ll have to pay CGT if you give it to your child – even if they didn’t give any money for it.
Money received in compensation can also be subject to CGT, and you could even be taxed on an asset you’ve inherited (but only when you actually sell it).
But it’s not all that bad - the tax only applies to the profit you’ve made, not the overall sale price. So if you bought a house for £240,000 and sold it for £260,000, you’ll only need to pay tax on the £20,000 gain – not the whole £260,000!
Note that if you are a property developer you may have to pay income tax, not capital gains tax, on your profits.
How it’s worked out
First of all, you need to appreciate that CGT is a net figure; if you’ve made money on some things, but lost money on others (a common scenario for investors), you’ll need to subtract your losses from your gains to find out the total amount of profit you’ve made – and thus the total amount of CGT you’re liable for.
Here are the basic rates:
Those who have gained less than £10,100 in the last fiscal year. Good news, you don’t have to pay anything!
Those who have gained £10,100 or more. You’ll have to pay a flat rate on all your gains, which can be either 18% or 28%.
- If your combined taxable gains and income are below the upper limit of the basic rate of income tax (currently £37,400), you’ll have to pay the 18% rate.
- If your combined gains and income total £37,400 or above, it’s 28%.
Those who sell business assets and qualify for Entrepreneur's Relief may be liable for a reduced rate of 10%.
For a full list of rates, visit www.hmrc.gov.uk/rates/cgt.htm - this should help you work out how much you need to pay.
Loopholes and exemptions
A number of personal transactions are wholly exempt from CGT. If you’ve sold your family home, or your main car, the tax doesn’t apply. Similarly, it isn’t applicable if you’ve received money from Isas, pensions, or government bonds, won a bet or lottery, or received compensation for personal injury.
You can get out of CGT by transferring assets to your spouse (although please note that you’ll need to pay the tax on gifts transferred to your children), or channelling profits into an Enterprise Investment Scheme.
Finally, as you may have already realised, you can significantly reduce your CGT bill by making the occasional minor loss – so if you’ve got a property you’re struggling to shift at a decent rate, or you’ve got shares in a plummeting company, you could actually make an overall gain by selling low – and cutting your tax obligation.
How to pay it
When it comes to calculating your CGT, it’s worth making a note of the profit, or loss, made each time you sell or dispose of an asset . This will help you keep track of the gains, and ensure that reduce the stress of working it all out at the last minute!
To register your gains and losses, you’ll need to get a self-assessment tax form and make a separate note of each instance of gain. If you’ve sold several properties for profit in the last fiscal year, or made money on shares in several companies, you’ll need to record each one.
When you’re filling out the details of each gain/loss on your self-assessment form, you’ll need to provide:
- A brief description of the asset (make, model, size, age, location, quantity etc)
- The dates you bought/acquired the asset, and sold/disposed of it
- The amount you paid for the asset, or the market value if you inherited it
- The total amount you received, or the market value if you gave it away
- The costs incurred in buying and selling the asset – such as stockbrokers’ fees or construction costs
- Details of any relief you’re getting
The HMRC website (www.hmrc.gov.uk) runs a comprehensive guide on CGT, and Which? (www.which.co.uk) offers a calculator to help you work out exactly how much you owe, and Tax Café (www.taxcafe.co.uk) provides detailed advice from a dedicated team.