Capital gains tax (CGT) is a tax on profits you make from an asset you have sold, exchange, given away or disposed of. You only need to pay tax on the profit/gain you made from the asset i.e. the increase in the value of the asset since you purchased the asset, not the amount of money you receive for the asset.
What does disposing of an asset mean?
Disposing of an asset can include:
- Selling the asset
- Giving the asset away as a gift
- Transferring the asset to someone else
- Swapping the asset for something else
- Getting compensation for an asset such as an insurance payout
What assets do you need to pay Capital Gains Tax?
- Personal possessions such as jewellery, paintings, antiques, coins, stamps worth £6,000 or more
- Property that is not your main residence
- Your main home if it is let out or used for business
- Any shares that are not in an ISA or PEP (Personal Equity Plan)
- Business assets
If you sell or gift away cryptocurrencies then you may need to pay capital gains tax.
If you dispose of any assets that are held jointly then you will need to pay capital gains tax on your share of the gain.
When do you not need to pay Capital Gains Tax?
There are however some exemptions to the capital gains tax. Some assets are tax-free and would not be liable under capital gains tax.
- Gifts to your husband, wife, civil partner or charity
- A car – unless you have used it for business purposes
- Anything with a limited lifespan of less than 50 years for example, machinery, antique clocks, watches
- UK government gilts and premium bonds
- Betting, lottery or pools winnings
Moreover, you may not need to pay capital gains tax if all of your financial gains throughout the year is under the capital gains tax allowance of £6,000 or £3,000 for trusts. This means that if the total gains throughout the year is £6,000 and below then you will not need to pay any CGT.
What is the Capital Gains Tax rate?
The rate of capital gains tax you have to pay depends on your income tax band and the type of asset that is disposed.
If you pay the basic rate income tax, the rate you for capital gains tax depends on the size of the gain, your taxable income, and the type of asset disposed. To work out the amount of capital gains tax you have to pay:
- Work out your taxable income – this is your total income minus your personal allowance and minus any income tax reliefs you are entitled to
- Work out your total taxable gains from disposing of the asset
- Deduct your capital gains tax free allowance from your total taxable gains
- Add this amount to your taxable income
- If this amount is within the basic income tax band i.e. below £50,270, then you will pay 10% on your gains (18% on gains from residential property). If the amount is above £50,270 then you fall into the higher income tax band
If you pay the higher rate income tax, you will need to pay 28% on gains made from residential property or 20% on gains made from other chargeable assets.
What if you inherit an asset?
If you inherit an asset, you may need to pay inheritance tax. You will only need to pay capital gains tax once you dispose of the asset you have inherited.
Do companies need to pay Capital Gains Tax?
If you are a sole trader or in a business partnership then you may need to pay capital gains tax. Small business owners may be eligible for a relief known as the Business Asset Disposal Relief, where the tax rate is set at 10% on all gains on qualifying assets.
Limited companies do not need to pay capital gains tax. Instead, they will need to pay corporation tax. The current corporation tax rate is 19%.
Capital Gains Tax Advice
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