Capital Gains Tax 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. There’s a tax-free allowance and some additional reliefs that may reduce your Capital Gains Tax bill. Sometimes you may have no tax to pay.
What is Capital Gains Tax?
Capital Gains Tax is a tax 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 the gain you make – not the amount of money you receive for the asset – that’s taxed.
You bought some shares for £2,500 in June 1992.
You sell them for £12,500 in May 2013.
You’ve made a gain of £10,000 (£12,500 less £2,500).
Are all assets liable to Capital Gains Tax?
Most assets are liable to Capital Gains Tax when you sell or dispose of them. This applies whether they’re in the UK or overseas.
However, some assets are exempt, such as your car, personal possessions disposed of for £6,000 or less and, usually, your main home.
Gifts, inheritance, divorce and Capital Gains Tax
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.
Making a gift to a child – or to other people or companies – is a ‘disposal’ for Capital Gains Tax purposes. You’ll need to work out if Capital Gains Tax is due. However, making a gift to a spouse, civil partner or charity usually won’t lead to Capital Gains Tax.
If you inherit an asset, it’s not liable to Capital Gains Tax 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.
Divorce, separation or dissolving a civil partnership
When you divorce, separate or dissolve a civil partnership, you may end up transferring assets between you. These are disposals for Capital Gains Tax purposes. Whether you’re liable depends on the date of transfer and whether you’re living together at the time.
Working out 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 should include any allowable costs associated with acquiring or disposing of the asset, and apply any tax reliefs.
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 Capital Gains Tax if you have overall gains above the annual tax-free allowance (see the section below).
The annual tax-free allowance
You have an annual tax-free allowance for Capital Gains Tax known as the ‘Annual Exempt Amount’.
The Annual Exempt Amount for the tax year 2013-14 is:
- £10,900 for each individual
- £5,450 for most trustees
If your overall gains for the tax year are above the Annual Exempt Amount, you’ll pay Capital Gains Tax on the excess.
If your overall gains are below the Annual Exempt Amount, you won’t pay Capital Gains Tax.
Your overall gain in 2013-14 is £18,000.
The Annual Exempt Amount is £10,900
You’ll pay Capital Gains Tax on the excess of £7,100 (£18,000 – £10,900).
Trustees, executors/personal representatives
If you’re a trustee or the personal representative of a deceased person’s estate, use the link below to find out how to use the Annual Exempt Amount.
If you aren’t resident in the UK, please use the link below to find out how to use the Annual Exempt Amount.
Rates of tax on capital gains
For 2013-2014 the following Capital Gains Tax rates apply:
- 18% and 28% for individuals (the tax rate you use depends on the total amount of your taxable income and gains)
- 28% for trustees or personal representatives
- 10% for gains qualifying for Entrepreneurs’ Relief
How to report a gain or loss
Once you’ve worked out that you have Capital Gains Tax 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 need to contact HM Revenue & Customs (HMRC).
If you normally complete a Self Assessment tax return, you need to check if your gains need reporting (see the reporting link below). If you have gains to report or a loss to claim, you’ll need to complete the additional Capital Gains Tax pages with your tax return.
Records you need to keep
It’s very important to keep any records about buying, selling or otherwise acquiring or disposing of assets. You should also keep any records that show your costs in relation to the asset. These will help you work out the gain or loss and support your tax return or claim.
IAIS are happy to advise you on your Capital Gains Tax issues and provide a planning service should you have Gains envisaged in the future. It is always important to do effective Capital Gains Tax planning at the earliest stage.