In this article we discuss the basics of Capital Gains Tax ‘CGT’ and how it is calculated and any deductions available to you that would reduce a potential liability.
What is Capital Gains Tax
Capital Gains Tax arises when you dispose of an asset and that particular asset has increased in value when compared to the original purchase cost. The difference between the sale price and purchase price, known as the ‘gain’ is what becomes taxable.
A disposal can take many different forms and does not just have to be a monetary consideration, they can be:
- Direct sale for cash
- Transferring/gifting it to another party
- Trading it for another asset/service
- Getting compensation for it
However, there are certain specific rules and not all gains or assets are subject to Capital Gains Tax.
When is Capital Gains Tax due?
There are certain criteria that crystallise a gain that becomes chargeable to Capital Gains Tax, these are disposals of the following:
- Shares that are not part of an ISA
- Property that is not your main home
- Business assets
- Items worth £6,000 or more (except your car)
In certain instances, your main home may become chargeable to CGT, however, there is a relief known as the ‘private residence relief’, the key criteria are:
- You did not buy it just to make a gain
- You have lived in it as your main home since you have owned it
- The grounds are less than 5,000 square metres
- You have not let it out
- No part of it has been used solely for business purposes
There is also a spousal relief where you can gift or sell assets to your spouse and not pay Capital gains tax, however, should they sell the assets in future they will crystallise a gain and this will be calculated back to when you originally purchased the asset. Not when you transferred/sold it to them.
Calculating Capital Gains Tax
First, you need to calculate the gain, as alluded to earlier in the article. Do this for all assets you have disposed of (only include your share if jointly owned)
Then you deduct any allowable losses such as losses on disposal of assets in prior years (see https://www.gov.uk/capital-gains-tax/losses for more details on loss availability).
Now deduct your CGT allowance (otherwise known as Annual exempt amount) which is currently £12,300 per year.
After all this if you have a gain then you will pay Capital Gains Tax at the applicable rates. If you are a higher rate taxpayer then this is 28% for residential property or 20% for other chargeable assets.
However, if you are not a higher rate taxpayer then it is calculated slightly different. You should work out how much income tax you pay, add this to your taxable gain after the annual allowance and then if you are within the standard rate band it is taxed at 18% for residential property and 10% for other assets.
Once the standard rate band is exhausted you will then pay at the higher rates mentioned above.
How can Invicta help?
At Invicta we understand Capital Gains Tax and the interactions it can have with other taxes and how best to make the relevant claims for deductions to make it as efficient as possible.
We act on your behalf, removing the stress and worry associated with remittances and filing the forms on time with the relevant parties.
Call Invicta Accounting on 01624 672358 or emails us at firstname.lastname@example.org to discuss your requirement.
All initial consultations are free and there is no obligation! Visit our website for more information on our other blog articles and keep your eyes peeled for future upcoming topics https://www.invicta-accounting.com/blog-post/