Capital Gains

In the UK, Capital Gains are the profits made from selling or disposing of an asset that has increased in value. The tax on these profits is knows as Capital Gains Tax (CGT). Here’s how it works:

What are Capital Gains?
Capital Gains occur when you sell or dispose of an asset for more than you paid for it. Disposing of an asset includes selling it, giving it away as a gift, transferring it to someone else, swapping it for something else, or receiving compensation for it (like an insurance payout).

Common Examples of Assets

• Property (not your main home, as it’s usually exempt if it qualifies for Private Residence Relief)
• Shares or investments (excluding those held in an ISA or PEP)
• Business assets
• Personal possessions worth £60,000 or more (excluding cars)

Calculation of Capital Gains
To calculate your capital gain, you typically subtract the acquisition cost (what you paid for the asset plus any costs associated with buying it, like broker fees or legal fees) and any allowable expenses (costs of improvements or selling expenses) from the amount you sold it for.

Capital Gains Tax Rates
The rate at which you pay CGT depends on your overall taxable income, the size of the gain, and the type of asset. As of 2023/2024 tax year, the rates are:

• For basic rate taxpayers: 10% on most gains, 18% on residential property gains
• For higher or additional rate taxpayers: 20% on most gains, 28% on residential property gains.

Annual Exemption
Each individual has an annual CGT allowance, which is the amount of gain you can make in a tax year without having to pay any tax. For the 2023/2024 tax year, this allowance is £6,000.

Reporting and Paying Capital Gains Tax
You must report your capital gains to HMRC through a Self-Assessment tax return or by using the real-time Capital Gains Tax service. The deadlines for reporting and paying CGT are specific and must be adhered to avoid penalties and interest charges.

Exemptions and Relief
There are various exemptions and reliefs available, such as:

• Private Residence Relief: For your main home.
• Entrepreneurs Relief: For those selling all or part of their business.
• Investors Relief: For external investors in unlisted trading companies.

Example Calculation

1. Selling Price: £50,000
2. Original Purchase Price: £30,000
3. Costs of Buying and Selling (e.g., legal fees, broker fees): £2,000
4. Capital Gain: £50,000 – (£30,000 + £2,00) = £18,000

If your total capital gains for the year exceed your annual exemption (£6,000 for 2023/2024), you’ll pay CGT on the excess amount.

Understanding the specifics of CGT can help you manage your investments and tax liabilities more effectively. If in doubt, it’s always wise to consult a tax advisor or accountant.