- Capital gains tax also known as CGT
can be an intimidating subject to understand.
To help you get to grips with it,
we put together a three-part series
on this often misunderstood tax,
starting with this video that will explain
what exactly is a chargeable capital gain?
Who is chargeable to capital gains tax?
When is CGT charged and what are the current rates?
And finally the annual and other exemptions.
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As the name suggests capital gains tax
is a tax on you guessed it capital gains.
Capital is wealth in the form of money or property
that is used to make more wealth,
and a gain is an increase in the value of that wealth.
Capital gains tax was first introduced in the UK in 1965,
and a CGT liability may arise when a chargeable person
makes a chargeable disposal of a chargeable asset.
But what is a chargeable person, asset and disposal exactly?
To answer this we put together a free PDF guide
explaining all three in much more detail.
Click on the link below to head to our website
and download it for free.
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In short you become chargeable to capital gains tax,
if you are an individual who is UK tax resident,
you are a trustee of a trust or settlement,
you are the personal representative of a deceased person.
And finally, you are a business partner in a partnership.
Companies such as limited companies
and limited liability partnerships
are not subject to capital gains tax,
but pay corporation tax instead on any chargeable gains
of disposal of assets held within the company.
Other organizations such as registered charities,
local authorities, amateur sports clubs,
health service bodies,
and registered pension scheme to name a few,
are all exempt from capital gains tax
subject to certain restricts.
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In very basic terms if a chargeable asset is sold
for more than the purchase price,
profit has been made and so a capital gain arises.
It's important to note that only the gain or profit
is taxed not the full amount received.
And don't forget a capital loss can also happen.
This is when the reverse situation happens
and the disposal proceeds are less than
the cost of the asset thus resulting in a loss.
Capital losses don't have to be wasted
and can be used smartly to reduce your overall tax bill
in the right circumstances.
So let's illustrate a capital gain with an example.
If you as a UK resident individual
bought some listed shares say for 1000 pounds
on the 1st of January, 2021,
and went on to sell them for 6,000 pounds
on the 30th of June, 2021,
the chargeable asset is the listed shares,
the chargeable person is you, the UK resident individual
and the chargeable gain in this simple example
is 5,000 pounds ignoring the annual exemption
and other deductible costs.
Remember it is not the full 6,000 pounds
that is subject to capital gains tax,
only the gain so 5,000 pounds in this case.
Now because the chargeable asset was disposed
on the 30th of June, 2021,
it has to be declared and reported
in the 2021, 22 tax year self-assessment return.
And what's more it is the net gain
that is subject to capital gains tax.
So in our example above,
let's suppose you incurred 500 pounds in broker fees
to sell your listed shares.
You can deduct this costs plus any other incidental costs
relating to the disposal and allowable expenses.
Therefore only 4,500 will become subject
to capital gains tax.
The current capital gains tax rates
in 2020 to 21 are as follows.
Residential property for an individual basic rate taxpayer
is 18% and for a higher rate taxpayer it is 28%.
And the main CGT rate,
which applies to most other assets is 10%
for basic rate taxpayers and 20% for higher rate taxpayers.
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Mostly individuals are entitled to an annual exemption
for CGT purposes.
For 2020 to 21 the exemption is 12,300 pounds for the year.
The annual exemption means that no CGT is payable
on gains up to that amount each year.
And the good news is if you have generated
a total capital gain of up to or less than
the 12,300 annual exemption,
then you don't have to formally declare a report,
your capital gain to HMRC.
Spouses and civil partners also have an annual exemption.
So for jointly held assets,
there is scope for exempting 24,600 pounds
worth of gains in 2021.
The same principle apply for future tax year
so long as the annual exemption is not taken away
by the chancellor.
The annual exemption is applicable
to the current tax year only on a use it or lose it basis.
It cannot be carried forward or taken back.
So anyone planning to make a series of disposals
should consider timing the sale
between two or more tax years,
to use as much and as many annual exemptions as possible.
Of course this is only possible with certain assets
such as shares and is far more difficult to do with assets
such as residential or commercial property.
Now, if you are a trustee,
then you are entitled to an annual exemption
equal to one half of the exemption available
to an individual.
So for the 2020 to 21 tax year this is 6,150 pounds.
However, trustees of settled property
held for people with disabilities,
or others in receipt of attendance allowance
or disability living allowance,
are entitled to the full annual exemption.