If you sell an asset for a profit then you may have to pay tax on the money that you make. This is called ‘Capital Gains Tax’ and could leave you with a sizeable tax bill if you sell shares, antiques or investment property for a profit.
In the next part of our series ‘52 Ways to Save Tax’ we look how you can pay less tax by using your annual Capital Gains Tax allowances. Keep reading to find out more.
52 Ways to Save Tax – Part 10: Use your Capital Gains Tax allowance
Capital Gains Tax (CGT) is the tax that you pay on the profit that you make when you dispose of an asset. Remember that any tax that is due is paid on the ‘gain’, not the whole amount you sell the asset for.
For example, you buy a painting for £10,000 and sell it for £50,000. The ‘gain’ you make is £40,000 and any CGT that is due would be paid on this amount.
It is not just selling an asset that creates a potential Capital Gains Tax liability. You may also have to pay tax if you gift an item to someone else, swap it for another asset or if you got compensated for it (for example if you received an insurance payout because an asset was destroyed).
When you may have to pay Capital Gains Tax
You may have to pay Capital Gains Tax if you make a profit (‘gain’) when you sell/dispose of a personal possession for £6,000 or more. Assets on which CGT may be payable include:
- Shares not held in an ISA or PEP
- Stamps and coins
- Property that is not your main residence
When you don’t pay Capital Gains Tax
There are certain items that are exempt from Capital Gains Tax and certain annual exemptions that you can use. These will help you to dispose of an asset on which you have made a gain without having to pay any tax.
You don’t pay CGT on:
- NISAs, ISAs or PEPs
- Betting, lottery or pools winnings
- UK Government gilts
- Premium bonds
- Personal possessions with a lifespan of less than 50 years
- Most gifts to your husband, wife, civil partner or a charity
- Your car – unless you’ve used it for business
You also have an annual Capital Gains Tax allowance, called the Annual Exempt Amount. This means that you only have to pay Capital Gains Tax on your overall gains above your tax-free allowance which, in the tax year 2014/15, was £11,000.
Working out your gains
You won’t pay any Capital Gains Tax if your total taxable gains are below your annual Capital Gains Tax allowance (£11,000 in the 2014/15 tax year). To work out what your gains are you should:
- Work out the gain you have made on each asset that you have disposed of in the last tax year (shares, personal possessions etc)
- Add together the gains to make a total
- Deduct any allowable losses
If your total gains are below your allowance you won’t have any Capital Gains Tax to pay.
If your gain is above the CGT allowance then you will have some tax to pay. The basic rate of CGT is 18 per cent although higher rate taxpayers – which may include you if your gains added to your other income carry you into the higher band – pay 28 per cent.