What is capital gains tax and how do you calculate it?
CAPITAL gains tax is the money you pay to HMRC when you sell something that has gone up in value, such as stocks and shares, artwork or even a second home.
Historically, the rates you pay are quite low and there are lots of exemptions, but chancellor Rishi Sunak is considering changing the rules to help plug holes in the UK's finances left by the coronavirus crisis.
Here's everything you need to know about capital gains tax including who pays it, what you pay it on, how much you are charged and the possible changes to come.
Which items trigger capital gains tax?
You pay capital gains tax, also known as CGT, on the profits you make when you dispose of certain items that have gone up in value.
"Disposing" is when you choose to sell something, give it away, swap it, or if you get compensation for it - such as an insurance payout.
You get a tax-free allowance each year, and you only have to pay tax on any profits you have above that amount.
This year, the tax-free allowance is £12,300 for individuals and £6,150 for trusts.
Even if you are below the threshold you might have to report your profits to HMRC - particularly if you are self-employed.
Not everything triggers capital gains tax and there are plenty of exempt items such as the home you live in and your car.
Things you will have to pay the tax on include:
- personal possessions worth £6,000 or more, apart from your car
- property that’s not your main home
- your main home if you’ve let it out, used it for business or it's very big
- shares that are not in an Isa or Personal Equity Plan
- business assets
- cryptoassets (such as cryptocurrency and Bitcoin)
You do not pay capital gains tax on money held in Isas, Personal Equity Plans, UK gilts and Premium Bonds.
Neither do you pay the tax on bets, lottery or pool wins.
Gifts to partners and charity
Giving your assets away doesn't exempt you from paying capital gains tax unless it goes to a certain set of people.
If you make a gift to your spouse or civil partner, you don't have to pay unless:
- you separated and did not live together at all in that tax year
- you gave them goods for their business to sell on
But if your husband or wife then goes on to sell the asset, they will have to pay CGT, based on the difference between the amount you originally paid and the value when they disposed of it.
Gifts to charity are also exempt but if you sell the asset to a charity for more than you paid you will have to pay.
How to report and pay capital gains tax
THERE is a handy government service that allows you to report and pay capital gains tax.
If you’re a UK resident you can use the to report any gains that are not from residential property.
You’ll need a Government Gateway user ID and password. If you do not have a user ID, you can create one when you report and pay.
When you use the service you’ll need to upload PDF or JPG files showing how your capital gains and capital gains tax were calculated.
You must report by December 31 after the tax year when you had the gains. So make the gains in this tax year - 2020/21 - and you'll need to report any gains by December 31, 2021.
You can also report gains using a self-assessment tax return. You do this in the year after you disposed of the assets.
If you have sold a property the deadline is sooner though, and you must within 30 days.
You may have to pay interest and a penalty if you do not report gains on property within the time limit.
How much capital gains tax will I have to pay?
How much you have to pay will depend on how much profit you made, what kind of tax payer you are, and whether or not you're selling property.
If you’re a higher or additional rate taxpayer you pay:
- 28 per cent on gains from residential property
- 20 per cent on gains from other qualifying assets
If you are a basic rate tax payer, it is quite complicated to work out how much you will owe as your gains can push you into a higher bracket.
First you have to work out your taxable income - this is your income minus your personal tax allowance of £12,500.
For instance, if you earned £20,000, your taxable income would be £7,500.
Next you need to calculate your taxable gains. To do this you work out your total profits from disposing an asset by deducting the price you paid from its value when you sold or gifted it, then you minus the CGT allowance.
For example, if you bought a painting in 2010 for £3,000 and then sold it this year for £23,000 your profit would be £20,000. You then deduct your allowance of £12,300 which leaves you with £7,700 of taxable gains.
Next you add the taxable gains (£7,700) to your taxable income (£7,500), which in this example would give you a figure of £15,200.
Of course, if you had disposed of lots of items you would have to calculate the taxable gains for all of them and add them to your taxable income.
If the figure you are left with is under the basic tax band (up to £37,500 for this tax year) you will have to pay 10 per cent in tax.
If the your gains push you up above £37,500 you will have to pay 10 per cent of the amount below that threshold and 20 per cent on the amount above it.
You may also be able to reduce your tax bill by deducting losses or claiming reliefs, you can find out more on the .
The rate of capital gains tax on buy-to-let properties and second homes for basic rate taxpayers is significantly higher - you need to pay 28 per cent of your taxable gains.
What changes is the chancellor considering?
Rishi Sunak is considering changing the rules around capital gains tax to try and plug holes in the UK's finances left by coronavirus bail out plans.
He has has commissioned the Office of Tax Simplification (OTS) to look into the historically low rates of the levy.
It is not yet known what measures could be introduced, but the chancellor is thought to be considering changing or scrapping some reliefs and exemptions, such as the one for people selling their main residence eg, their home.
The OTS has launched a consultation on capital gains tax which closes on October 12.
After that, it will be publishing its findings on how the tax systems works and whether it should be revamped.
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