March, 2011

What You Should Know About Capital Gains Tax And Your Property

If you own an asset, such as a property, you may face a Capital Gains Tax liability when you sell it.

However, Capital Gains Tax doesn’t apply to all property.  So, our handy guide explains everything you should know about Capital Gains Tax and property.

What is Capital Gains Tax and when is it paid?

Capital Gains Tax is a tax on the profit or gain that you make when you sell or otherwise dispose of an asset.   Disposing of an asset means that you sell it, give it away as a gift, exchange it for something else or transfer ownership of it to someone else.

Capital Gains Tax is paid on the gain that you make between purchase and disposal.  It is not charged on the amount of money you receive for the asset – just the gain.

When you sell or otherwise dispose of property – such as a building, land or lease – you’ll usually have to work out if there’s any Capital Gains Tax to pay.  However, you don’t normally pay any Capital Gains Tax on any gain made on your own main residence (see below).

Property that normally incurs a Capital Gains Tax liability on any gain being made includes:

  • A second home in the UK or abroad
  • A property you bought as an investment
  • Business premises
  • Land

Capital Gains Tax on your own home

As long as you’re entitled to full Private Residence Relief, you don’t have to pay Capital Gains Tax when you sell or dispose of your own home.

You must have used the property as your only or main residence throughout the time you’ve owned it. You may also have to meet other conditions.

Selling or giving your property to family

If you sell, give or otherwise dispose of a property to your spouse or civil partner you don’t pay Capital Gains Tax as long as you’ve lived together for at least part of the tax year in which you made the disposal.

However, if your spouse or civil partner later sells or disposes of the property, they’ll have to work out the tax due.  You should keep a note of what you paid for the property as your spouse or civil partner may need this to work out their Capital Gains Tax liability when they sell or dispose of the property.

If you give away your home, for example to one of your children, you don’t have to pay Capital Gains Tax as long as you’re entitled to full Private Residence Relief.  However, your child may have to pay Capital Gains Tax when they sell or dispose of it.

If you dispose of a property (that’s not your main residence) to any other family member – or to a spouse or civil partner that you haven’t lived with during that tax year – you’ll have to work out the gain or loss made and any Capital Gains Tax due.

Buying and selling property as a business

If you buy and sell property as a business, you pay Income Tax on any profits that you make, not Capital Gains Tax.  Any profits that you make will have to be declared on your Self Assessment tax return.

However, if your property trading business operates as a limited company, profits on the sale of property assets will form part of the company’s profits.  These will then be subject to Corporation Tax.

3 Things Everyone Should Do Before The Tax Year Ends

The current tax year ends on 5 April 2011.  With changes to personal allowances and tax scheduled to come into effect in just a matter of weeks, there are several steps you can take now to minimise the amount of income tax that you pay.

Our guide suggests three things you should do before 5 April.

Budget for the new tax regime

With several important changes coming into effect on 6 April, it is vital that you budget for the impending tax hikes and benefit cuts.  Suggestions include:

  • Budgeting for the National Insurance rise of 1 per cent
  • Allowing for cuts to working and child tax credit (particularly for households with income over £40,000 or families with a child under the age of one)
  • Preparing for the fall in Winter Fuel Allowance
  • Preparing for the three year freeze in Child Benefit

Contribute to an Individual Savings Account (ISA)

Individual Savings Accounts offer tax-free savings to everyone.  That means that you can receive interest on your savings without any income tax being deducted.

So, if you haven’t contributed to an ISA in the tax year 2010/11 you have until April 5th to do so.  The maximum that you can contribute to a cash ISA before 5 April is £5,100.  However, if you want to invest in a ‘stocks and shares ISA’ you double your allowance to £10,200.

Of course, you can maximise your tax free savings each year.  After 6 April 2011 you will be able to contribute a further £5,340 to a cash ISA or £10,680 to a ‘stocks and shares’ ISA.

Use up your tax allowances

Our final piece of advice is to use up any other tax exemptions such as your capital gains tax (CGT) and inheritance tax (IHT) allowances.

You are allowed to make capital gains of £10,100 this tax year without paying any tax.  So, you may want to consider selling some assets (such as shares, for example) in order to maximise your CGT allowance.

And, if you have a large estate and are worried about Inheritance Tax, you are permitted to give away up to £3,000 tax free each tax year.  You can carry over any unused IHT allowance from the previous tax year and so if you have never made any such gifts, you could potentially gift up to £6,000 before 5 April 2011.

Bear in mind that there is also an IHT ’small gifts exemption’.  This means that gifts of £250 are also free of IHT.  Although there is no restriction on the number of small gifts that you can make, they must each be to separate individuals (for example you cannot combine the ‘small gifts exemption’ with the annual exemption to give someone £3,250.)

Are You Employed Or Self Employed For Tax Purposes?

The way that you pay tax and National Insurance depends on your employment status.  As well as determining how you pay your tax, whether you are employed or self-employed also affects your employment rights and what benefits you may be entitled to.

Our guide will help you work out whether you are employed or self-employed and how this may affect how you pay tax.

Are you employed or self-employed?

The easiest way to work out your employment status is to answer these questions:

You are probably employed if:

  • You have to do the work yourself
  • You have to work a fixed amount of hours
  • You are paid a set amount depending on the hours that you work
  • You get paid for working overtime
  • You are told when, where and how you do your work
  • You work for someone who is in charge of what you do

You are probably self-employed if:

  • You take responsibility for the success or failure of the business
  • You provide the equipment needed to do your work
  • You decide who to hire to help you with your work
  • You have a number of clients/customers simultaneously
  • You decide when, where and how you do your work

Sometimes you may be both employed and self-employed at the same time.  For example, you may work during the day and then run your own business from home in the evenings and at weekends.

Ultimately, whether you are employed or self-employed depends upon what your contract says and the facts of your working arrangements.  Sometimes the courts have to get involved to determine the basis of your employment; for example after a dispute about benefits.

Paying tax and National Insurance if you are self employed

If you are self employed, you are responsible for paying both tax and National Insurance contributions.  You have to let HM Revenue and Customs (HMRC) know that you are self employed – there are penalties if you don’t register as self employed – and you must fill in an annual Self Assessment tax return.

Paying tax and National Insurance if you are employed

If you work on an employed basis, it is your employer who is responsible for paying your tax and National Insurance contributions on your behalf.  They do this through the Pay as you Earn (PAYE) system.

If you are employed you are also entitled to a further range of benefits.  For example, you are entitled to sick pay, Jobseeker’s Allowance (if you lose your job), paternity and maternity leave and a State Pension when you retire.



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