What is Capital Gains Tax?
Capital Gains Tax, or CGT, was first introduced in 1965 on gains made on the disposal of assets by individuals, personal representatives and trustees. CGT is a tax on profit when certain assets that have increased in value are sold (or ‘disposed of’). It is the gain or profit made that is taxed, not the total amount of money received.
When does CGT apply?
CGT applies when your client sells, gives away, exchanges or otherwise disposes of certain assets. They may be subject to CGT on disposals of assets located anywhere in the world, not just in the UK. The rules are different depending who on receives the gift, and there are some special reliefs in relation to business assets.
Typical assets that may be liable for CGT:
- Investments – this includes shares, bonds (but not usually Investment Bonds) and other securities that are held outside a tax wrapper (CGT is not payable for ISAs and PEPs)
- Second homes – properties in the UK that are not the main home such as holiday homes and buy-to-let properties
- Overseas property – if the client is resident in the UK for tax purposes
- Sale of an inherited property – CGT is calculated as the difference between the value when inherited, and when sold
- Sale of a business – when a client has 5% or more of the shares in the company they may qualify for Entrepreneur’s Relief, which reduces the CGT rate
- Valuable personal possessions – items including jewellery, antiques, paintings that are sold for more than £6,000 attract CGT
What rate is CGT charged at?
Since April 2016, four different rates of CGT exist, these vary dependent on the asset that has made a profit and the income tax rate of the seller. If a capital gain on an asset that is not a property:
- Basic-rate taxpayers pay CGT at 10%
- Higher-rate taxpayers and additional-rate taxpayers pay CGT at 20%
- If personally they have made a capital gain on a second home or buy-to-let investment or other land and buildings:
- Basic-rate taxpayers pay CGT at 18%
- Higher-rate and additional-rate taxpayers pay CGT at 28%
What is the annual exemption?
Each tax year, most individuals who are resident in the UK are allowed to make a certain amount of capital gains before they have to pay CGT. This is because they are entitled to an annual tax free allowance, called the annual exemption or annual exempt amount.
For 2017/18, the tax-free allowance is £11,300. Any unused exemption cannot be carried forward but losses can and therefore should be recorded.