Capital Gains Tax, or CGT as it commonly known, is a tax on the profit (gain) you make when you sell or dispose of an asset.
You are deemed to dispose of an asset when you cease to own it.
This can occur in a variety of situations: sell it, give it away, transfer it to another person, exchange it for something else; or receive compensation for it, such as an insurance pay-out.
Each tax year (April 6-April 5) you receive an annual tax free allowance for CGT which is known as the Annual Exempt Amount.
For the current tax year (2014/15) it is £11,000 for individuals.
Therefore if you sold an asset, such as shares, for £21,000 which originally cost you £8,000 your gain is £13,000 – but £11,000 of this is covered by your annual exemption, meaning that you are taxed on the balance of £2,000.
The current rate of CGT is 18 per cent and 28 per cent for individuals (the rate depends on the amount of taxable income and gains).
Most assets are liable to CGT when you sell or dispose of them.
These include shares, property, business assets and personal possessions.
However, certain assets are exempt, such as your car, and in nearly all cases your main home. Other exempt assets are:
- personal possessions worth up to £6,000 each, such as jewellery and paintings
- stocks and shares held in tax free investments, such as ISAs
- betting, lottery and pools winnings
- personal injury compensation
- UK Government securities, such as National Savings Certificates and Premium Bonds
If you make a gift to a child or another person it is a disposal for CGT purposes.
However, making a gift to a spouse won’t usually lead to CGT as any transfer of an asset between husband and wife (including civil partners) is treated as neither a gain or a loss for the person transferring it.
However, if you have separated or divorced different rules apply.
If you inherit an asset, it is not liable to CGT until you sell or dispose of it. You will usually need to get a valuation at the date of death (probate value) to work out the capital gain on any disposal.
Depending upon the asset you are disposing of there may well be other reliefs available and in our next article we will look at types of asset and reliefs in more detail.