We’ve all had items we’ve no longer wanted, items we have sold to other people and possibly even made a profit. Normally nothing else needs to be done, but what about unusual cases such as expensive items, shares in a company or even a house?
The above examples could be liable for Capital Gains Tax (CGT). CGT is a tax on the profit, or gain made from when you sell or “dispose” of an item or asset. It doesn’t necessarily have to be sold to count as disposed for CGT; you can also exchange it for something else, receive compensation for it (such as it being damaged and you receive a payout), or even if you give or transfer it to someone else it could be liable for Capital Gains Tax.
For example, if you had a painting you bought for £2,000, then sold it for £13,000, you would pay tax on the £11,000 gain you have made. If there were any costs in selling the asset, such as auction expenses, you would be able to subtract this from the gain and reduce your CGT.
Just like with income tax, you have a personal allowance for CGT that is a tax free amount you can earn each year before you have to start paying tax. The amount for the tax year ending on the 5th of April 2016 is £11,100. This allowance counts for the total amount of gains from all sales that are liable to CGT, so the above example would not have any tax to pay, providing that it was the only asset sold.
This allowance is the same for everybody, which provides a handy way of reducing any taxable gains if you are married. Assets being transferred between spouses are exempt from CGT, which means if one spouse uses up their CGT personal allowance they can transfer assets to their spouse to use up their allowance as well, resulting in the pair doubling their CGT personal allowance. This is providing that the allowance hasn’t been used up on their own CGT liable gains.
CGT is also charged at different amounts depending which income tax rate band you are currently charged at. If you are in the 20%, or basic rate band, you will pay CGT at 10% and if you have already used up your 20% tax rate band then you would pay CGT at 20%.
There is an exception for residential properties, which are first charged at 18% and then 28% when you have used up your 20% tax rate band
Sometimes an asset is sold and you actually make a loss, when this happens you can set this loss off against any gains for the year, in much the same way as you would if you made a loss in a business.
If you do have CGT to pay, you will need to complete a self assessment tax return just like someone who has their own business.
Not all assets are liable to CGT, otherwise we would have to fill in a tax return and pay tax nearly every time we sold something. Common examples are everyday items where the proceeds from disposal are less than £6,000, cars and other assets expected to have a lifespan of less than 50 years and if you sell the house that you are living in.
If you make a loss on an exempt asset, you cannot claim the loss against gains for the year, the process unfortunately works both ways.
You can find more information about what is liable for CGT by clicking this link.
I will be covering the individual rules for selling houses, everyday items and shares in separate blogs. In the meantime if you feel you would like assistance or have any questions regarding the above, please do not hesitate to contact me.