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What is Capital Gains Tax?

by John Saunders
23rd Nov 20 3:22 pm

Many taxes lurk in the background of your everyday financial affairs that most people aren’t even aware of. Capital Gains Tax (CGT) is one such example. It is a tax on the profit you make when you sell or dispose of an asset that has since increased in value. Because it’s not as mainstream as other taxes, it could well be the case that you are only familiar with Capital Gains Tax after inheriting property or other assets. Find a local accountant to help with your capital gains tax.

As CGT applies in many different scenarios, it’s always good to be aware of it, as you may be required to pay it at some stage. Here is a basic overview of what is Capital Gains Tax to tell you more.

Capital Gains Tax: An overview

If you make a substantial profit on something you own, you have to pay Capital Gains Tax. This may include the likes of shares, funds, a second home, art or antiques. The amount you pay is based on the gain made since you first acquired and then sold the asset, rather than the total value of the asset itself.

There are two types of Capital Gains Tax, one for assets and the other for property. How much you pay will also depend on your tax band rate. At the time of writing, this ranges for 10% for assets for a basic taxpayer, up to 28% for property for a higher or additional-rate payer.

However, as with regular tax, there is a personal allowance of £12,300 for Capital Gains Tax. The good news is that the figure rises slightly each year. If you make under the allowance in profit from any assets you sell that are subject to CGT, then you won’t have to pay anything on them.

If transferring assets between a husband, wife or civil partner you also will be exempt from paying Capital Gains Tax. Whatsmore, it may be classed as a ‘joint allowance’ which is £24,600 for 2020/21. However, if you choose to transfer any assets between your partner and you later decide to sell that asset, you’ll be charged on the gain made during the time it was owned by you as a couple.

What you pay it on

  • Most personal possessions worth £6,000 or more
  • Your main home if it’s been let out or has been used for business purposes
  • A buy to let or a second property
  • Inherited property
  • Shares that are not in an ISA or PEP
  • Business assets such as land, buildings, fixtures or fittings

What you don’t pay it on

  • Gifts given by a spouse, civil partner or a charity
  • A car that hasn’t been used for business purposes
  • Personal possessions with a lifespan of fewer than 50 years
  • Items you’ve inherited that you don’t wish to sell
  • Any gains which come under your personal or joint allowance

Where can I get more help?

Capital Gains Tax is extremely complex, especially as the thresholds are ever changing. While you can consult the official government website, it’s always worth having a chat with an accountant too. The benefits of doing so are that you can get the latest advice, as well as help with your asset management.

To sum up

Capital Gains Tax is a government charge that catches most people out, especially if they have inherited property or other assets. If you aren’t familiar with CPT it’s always worth asking for expert advice.

The sooner you work out if you have to pay anything and how much, the quicker you can deal with it.

Going forward, it’s always worth brushing up on any taxes or charges you are liable for so that you aren’t given any nasty surprises!

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