Are you are planning to sell, give away or otherwise dispose of an asset that you own?
Whether you’re planning to sell shares or your home, there is a possibility that you will face a tax liability if you have made a gain or profit on the asset. Capital Gains Tax (CGT) is the tax payable on the profit that you make when you sell an asset, although it isn’t payable in all circumstances.
Here are five things that you should know about Capital Gains Tax in the UK.
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. Common situations where you ‘dispose of’ an asset include when you:
- Give it away as a gift
- Sell it
- Exchange it for something else
- Transfer it to someone else
- Receive compensation for it (e.g. you receive an insurance payout when an asset has been destroyed)
Remember that you are not taxed on the amount that you receive for the asset – just on the gain/profit that you make.
Are all assets are liable for Capital Gains Tax?
Most assets – other than those covered below – are liable to Capital Gains Tax when you sell or dispose of them. However, there are circumstances when you won’t pay CGT even in the event of a gain. You should get in touch with your Tax Office if unsure.
Some assets that are exempt from Capital Gains Tax include:
- Your main home (although not in every instance – check with your Tax Office for details)
- Your car
- Stocks and shares you hold in tax-free investments (such as ISAs or PEPs)
- Personal possessions worth up to £6,000 each
- Betting, lottery or pools winnings
- Personal injury compensation
How do you work out your gains on an asset?
When you sell or dispose of an asset, you should calculate out the gain or loss on each asset separately. You are permitted to deduct any allowable costs associated with acquiring or disposing of the asset, and apply any tax reliefs that are appropriate.
You then bring all the individual gains and losses together to work out the overall gain or loss for the tax year. If you’ve got unused losses from earlier tax years – and have claimed them in time – you may be able to deduct these as well.
For example, you bought some shares for £1,000 in August 1995. You then sell them for £10,000 in May 2010. Your gain would be £9,000 (£10,000 less £1,000). You pay tax on the gain, not on the amount you receive when you dispose of an asset.
Do you always pay Capital Gains Tax on a gain?
As well as the exempt items (where no CGT is payable), you also have an annual tax-free allowance for Capital Gains Tax known as the ‘Annual Exempt Amount’.
The Annual Exempt Amount for the tax years 2009-10 and 2010-11 is £10,100 for each individual and £5,050 for most trustees. You will only pay Capital Gains Tax if your overall gains for the year are above the Annual Exempt Amount.
How do I report a gain or a loss?
If you have Capital Gains Tax to pay and you haven’t received a tax return or letter asking you to complete a tax return, you should contact your Tax Office.
If you normally complete a Self Assessment tax return, you will need to complete the additional Capital Gains Tax pages and send these in with your tax return.