November 14th, 2014.
Your Complete Guide to Capital Gains Tax
“Death and taxes and childbirth. There’s never any convenient time for any of them.” – Margaret Mitchell.
Capital gains tax.
On the surface, it can be defined simply as “a tax levied on profit from the sale of property or an investment.”
But what does that actually mean?
This – and a number of other frequently asked questions – will be answered below.
What is Capital Gains Tax
The technical definition is that it is a tax on the gain or profit you make when you sell or ‘dispose of’ an asset.
There are several ways to dispose of an asset:
• Giving it away
• Transferring it to someone else
• Exchanging it for something else
• Receiving compensation for it e.g. during an insurance payout
• Selling it
Now it’s important to note that you are taxed on the profit you make and NOT the amount of money you receive. So for example, if you bought shares in a company for £1,500 and then a year later sell those shares for £3,500…you’ve made a profit/gain of £2,000 and this is what you’ll be taxed on.
How much is the Capital Gains Tax?
It’s important to check with HM Revenue and Customs, but as of 2013/14 the Capital Gains Tax rates were as follows:
• 10% for gains qualifying for Entrepreneurs’ Relief
• 18% and 28% for individuals (depending on the total amount of your taxable income and gains)
• 28% for trustees or personal representatives
What assets are liable for Capital Gains Tax?
Most assets are liable for Capital Gains Tax when you dispose of them…and this stands whether or not the assets are in the UK or overseas. There are, however, a few exceptions such as your car, personal possessions disposed of for £6,000 or less, and usually your main home.
How does Capital Gains Tax affect gifts, inheritance and divorce?
These 3 scenarios are common blind spots when it comes to assessing Capital Gains Tax liability. And that’s because of how many complex situations can arise.
For example, giving a gift to a spouse usually won’t result in Capital Gains Tax, but making a gift to a child is a ‘disposal’ for Capital Gains Tax.
It’s worth consulting with a financial professional to help you navigate all the potential pitfalls of Capital Gains Tax. But as a rule of thumb, if any gain has been made, then chances are high that you are liable for Capital Gains Tax.
Is there an annual allowance for Capital Gains Tax?
Yes, and this allowance is called the ‘Annual Exempt Amount’. In the 2013/14 tax year, this allowance was as follows:
• £5, 450 for most individuals
• £10,900 for each individual
Once you exceed the ‘Annual Exempt Amount’, you’ll pay Capital Gains Tax on the excess.
What paperwork do I need for reporting Capital Gains Tax liability?
The key piece of paperwork is the annual tax return that you receive from HM Revenue and Customs (HMRC). The way you report any gains may differ if you usually complete a Self Assessment tax return; be sure to check this carefully.
But in addition to the tax returns, it is vital that you keep careful records about all buying, selling, acquiring or disposing of assets…as well as records of any costs associated with your assets.
These records will be invaluable in helping you accurately determine and calculate your Capital Gains liability.