CGT is a tax which is charged when you sell, give away as a gift, exchange for something else or in any other way dispose of an asset for profit or gain. CGT is not charged on the amount of money you receive for the disposal of an asset rather it is only the gain you make is taxed.
To simplify we can say CGT is a tax on the profits or gains, when you sell/dispose of an asset that has increased in value.
Let us see an example to understand this.
You bought an antique statue for £5,800 and sold it later for £25,000. This means you made a gain of £19,200 (£25,000 minus £5,800).
Capital Gains Tax Allowances
You only have to pay Capital Gains Tax on your overall gains above your tax-free allowance which is £12,300 for tax year 2020-21.
Tax-free allowances for previous years can be accessed at [https://www.gov.uk/guidance/capital-gains-tax-rates-and-allowances#tax-free-allowances-for-capital-gains-tax]
Exempt Assets
You do not pay Capital Gains Tax on certain assets. Some of them are:
- UK government gilts and Premium Bonds
- Gifts to UK registered charities
- Personal belongings/ chattels if the sale proceeds are less than £6,000
- Betting, Lottery or Pools Winnings
- Assets held in ISAs
- Foreign currency held for your own use
Cars are always exempt from CGT but vans and lorries are not, because they do not satisfy the legal definition of the word “car”.
Subject to certain criteria, often there is no CGT on the sale of your own home/main residence and you have lived there throughout the time you owned it. You can not exted this tax-free status to second homes or properties which are rented out and at a given time you can only have one main residence.
This is not an exhaustive list of asset exempt from CGT there are some other assets that are also exempt from capital gains tax.
Remember, If an asset is not specifically exempt from CGT, it must be a chargeable asset for capital gains tax.
Transfers between Spouses and Civil Partners
There is no Capital Gains Tax on assets when you gift or sell to your spouse or civil partner. Any transfer between a husband and wife is treated as taking place at no gain and no loss. This means that spouses/civil partners can transfer assets freely between them, without incurring any CGT charge.
Gifts to Charity
There are special rules for CGT when you gift or dispose of an asset to a charity. You do not pay CGT on assets you give away to charity. However, you may have to pay CGT if you sell an asset to charity.
The normal rules apply for gifts to anyone else.
Capital Gains Tax Rates
CGT is charged to individuals depending on the level of their taxable income and the nature of the asset they dispose of.
Basic rate tax payers pay CGT at 10% on gains to the extent that do not exceed their unused basic rate band and at 20% to the extent that they exceed the amount of the unused basic rate band. If an individual pays tax at the higher or additional rates on his income, then the rate of capital gains tax is 20%.
CGT rates are different if the gain arises is on the disposal of a residential property. In this case the 10% rate increase to 18% and 20% rate increase to 28%.
You pay CGT when your total taxable gains are above your annual CGT allowance and if your total gains are less than your annual tax-free allowance, you do not have to pay any CGT. Contact us today if you have any question about Capital Gains Tax or you need any assistance with your CGT liability. One of our experts will be happy to help you.