Capital Gains Tax comes into play when you make a substantial profit from selling something you own. The important point to remember is that the tax is made on the profit you make and not the amount you sold it for. As the name suggests, it’s all about the gain!
So, essentially it’s a tax on profits and it applies to most assets when they’re sold. There are some exceptions however. For example, your car, your house and personal possessions sold for £6,000 or under are all exempt.
Capital Gains Tax can also be applied to assets offered as gifts. A valuation needs to be made of how much it would cost ordinarily, and if a gain is calculated, the tax is applied.
If you inherit an asset then you won’t have to pay capital gains until you sell it. At which point you will need have worked how much it cost at the time you inherited.
How much do you need to gain before being liable for capital gains?
For the tax year 2010-2011 you are exempt from having to pay Capital Gains Tax if you’ve made less than £10,100. This is known as the annual tax-free allowance or the Annual Exempt Amount.
Here’s an example of how much you’d need to pay:
You’ve worked out that you’ve made £15,000 from your assets. That means £4,900 is now taxable. This begs the question: what percentage of that amount is taxed…?
The tax rate
There are two different rates for individuals: 18% and 28% depending on the total amount of income and asset gains. If you qualify for Entrepreneurs’ Relief this is reduced to 10%.
On the other hand, for trustees or personal representatives it’s 28%.
Remember to keep records
It’s crucial to keep records when you buy and sell or giveaway assets. And then record them in the appropriate manner i.e. as part of your self-assessment return.
For some more in-depth information on Capital Gains Tax, HMRC provide an exhaustive guide.