What is Capital Gains Tax?

In the United Kingdom, like many countries, there is a very complicated tax system, a series of levies imposed upon both individuals, businesses and organisations. 

These levies are payments that have to be made the government via Her Majesty’s Revenue & Customs (HMRC) and are based on either revenue or asset values depending on the nature of the tax.

While we all know about PAYE – the tax we pay on our wages – capital gains tax (CGT) is a slightly more complicated matter.

In the simplest of terms, capital gains tax is a levy on any realised increase in the value of a ‘possession’ or ‘property’, whether that possession is a physical object such as an antique clock, a precious metal, gold or silver, any financial investment, shares in a company or even cryptocurrency. 

Capital gains are also paid on any realised increased value of a ‘bricks and mortar’ property, excluding your principal residence.

One thing to take particular note of is the term “realised increase in the value”. This term means the difference in the value of a property or a possession when it is sold, compared to its value when it was acquired.

As an example, imagine you have bought shares in a company, and those shares had a capital value of £20,000, in other words, they cost you £20,000 to buy. Over the next year, the value of those shares rose substantially, and you decided to sell them for £40,000. The “capital gain” would be £20,000.

Now, when it comes to CGT, for the amount of tax that has to be paid to HMRC, there is no fixed rate. Instead, the amount of capital gains tax that has to be paid is assessed based on the rate of income tax you currently pay, with an annual tax-free allowance of £12,300 for the tax year 2020/2021. This allowance means that you do not have to pay any CGT on the first £12,300 of any capital gain.

So, to continue with the above example, when it comes to paying capital gains, only £7,700 of the £20,000 capital gain will be taxable (£20,000 gain – £12,300 allowance) = £7,700.

What is important to remember is that the capital gain relates solely to the realised increase in the value of possession, not the total sale price of the possession.

Capital Gains Tax Exemptions

Not everything is subject to full or any capital gains. The following is a shortlist of the most common items which are exempt from CGT:

• Personal possessions which have a value up to £6,000, though this also includes your car, whatever its value.
• Your main home or primary residence – holiday homes, buy-to-let, land and business premises, etc. are not exempt.
• Shares which you have in an ISA (Individual Savings Account) or PEP (Personal Equity Plan).
• Wins from gambling, the Lottery and Premium Bonds.
• UK government gilts.

The UK governments website has an excellent section on Capital Gains Tax here.

Capital losses

It should also be noted that if you have a negative capital gain after selling a particular possession – in other words, you sold it for less than you paid it – that loss can be offset against any other capital gain in that financial year. If you do not make any financial gain that year, the loss can be reported to HMRC, and the loss can be carried over into the next tax year. 

Takeaway

Have you been the subject of a tax investigation? Can you limit the amount you pay? Look for further! Contact our tax solicitors to get advice and support that is tailored to your specific needs.