Capital gains tax (CGT) is the tax you are liable to pay for if there has been increase in the value of items that you own, during the period of time that you have owned them. When it comes to paying, it is still the case that you will need to pay capital gains tax if you then give away these possessions at a later date, or if you make the decision to swap them for something else, claim compensation, or sell the possessions in question altogether.
In terms of what you will be liable to pay tax for, this refers specifically to the ‘gains’ that you have received, not what you have ended up receiving overall. Capital gains tax is very often applicable in cases of property development. Companies and developers will often purchase a property, improve the property thought building and renovation works and then sell it on at an increased amount and profit.
Furthermore, it is not uncommon for a property to be purchased and then rented out, generating rental income. In such cases, the value of the property can skyrocket as not only does the actual building’s value increase, but its status as an investment. Another factor which is likely to see the property’s value rise is if its area becomes more desirable and although this is out of your control, should you sell the property, you will be liable to pay tax on Capital Gains (Source: Arthur Online Property Management Software.)
Because it can be rented out, it is a tangible asset which can generate profit or be sold, making it a very attractive prospect.
In cases such as these, you may need to seek financial advice for how to assess the Capital Gains made by the property and therefore how much tax you will be liable to pay.
Capital gains on profits
For example, if you decided to sell a ring for £30,000, but it was bought at £10,000, you have made a net gain of £20,000, and this is what you will need to pay capital gains tax on. Not all possessions require you to pay capital gains tax on them though. This is because you will need to have passed a certain threshold of profit prior to having to pay CGT for them.
When it comes to how much you will need to pay, this will be dependent on a number of factors. Most importantly, the CGT you will be liable to pay will be based on whether or not you are a basic-rate or higher-rate taxpayer. Furthermore, the stipulated tax-free allowance for that particular tax year will also affect how much CGT you will end up paying.
When do I need to pay capital gains tax?
There are a particular set of circumstances in which it will be a legal requirement for you to pay capital gains tax. Otherwise known as chargeable assets, these include any of the following investments:
- A second property.
- Personal possessions of yours that are worth more than the total of £6,000.
- Shares that you have (excluding those in an ISA or PEP).
- The sale of a business.
- If you have high-value possessions, such as art, jewellery or antiques.
- Shares that you have providing they are not in a PEP or an ISA.
You should also take into consideration that if you sell an asset that is owned jointly with somebody else and it falls into one of the above categories, you will still need to pay capital gains tax for it. The exact amount that you pay for this will be dependent on the percentage of your shares for it.
When do I not need to pay capital gains tax?
Some assets do not require you to pay capital gains tax. But what exactly are these things? The following are all exempt from CGT:
- If you make a profit from selling your own property. The only exceptions are if you have let it out, it is unusually large in size, or used for business purposes.
- CGT will not be required on gifts to charity.
- The sale of private cars.
- Possessions with a useful life less than 50 years.UK government gilts as well as premium bonds.
- Betting, lottery or pools winnings.
- Amount you leave on death (but it worth noting that it still may be the case that you are liable to pay for inheritance tax).
What is the capital gains tax allowance for 2018/2019?
The amount of capital gains tax you will be liable to pay will be depending on the allowances for that particular tax year. In terms of what this is for the tax year 2018/2019 it is £11,700 and £5,850 for trusts.
You may find that you can reduce your tax bill through deducting any losses that have been made. It is worth noting that it is not possible to do this with all assets, therefore you should check out the GOV UK website beforehand for details as to when this applies.
Capital gains tax rates for 2018/2019
The exact rate you pay will be based on the type of asset you have received gains from, as well as your tax band:
- If you have made gains on an asset that isn’t property, you will pay CGT at 10% (for basic rate taxpayers) and 20% if you are a higher rate taxpayer.
- If the capital gains have been made on a buy to let property or second home, you will pay CGT at 18% for basic rate taxpayers.