A Capital gain or loss is the profit or loss that you make when you sell an asset for a price other than what you paid for it, Capital gains tax is the tax that is levied on the profit you make when you sell the asset for a value greater than what you paid for it.
Capital gains tax (CGT) is not counted as a separate tax but is rather seen as a part of income tax. It is important to remember that this tax is placed solely on the profits that are made from the sale (i.e. the difference between the price it was bought for and sold for) and not the entire value of the sale. This means that if the asset was sold for a loss then no capital gains tax will be due. CGT only applies to asset that have been acquired after 20th September 1985, since that is when the tax came into existence.
There are a number of ways an assets can be disposed of. These include:
- Selling the asset
- Giving the asset away as a gift
- Swapping the asset for something else
- Receiving compensation for the asset. e.g. insurance payout for damage
Paying your Capital Gains Tax
Capital gains tax is paid whenever you dispose of or sell a chargeable asset. This includes assets that are:
- Personal possessions (except for your car) that are valued at over £6,000
- Any property that isn’t regarded as your main home
- You main home if it is very large, used for business or has been let out
- Shares that are not in an ISA or PEP
- Business assets
If you are selling an asset that you are the joint owner of, then you will only owe CGT on your share of the capital gain. CGT can be reduced by claiming tax relief if it applies to the type of asset you are disposing of.
Capital gains tax is not owed on the profits made on assets in ISAs or PEPs, UK government bonds and gilts, pools, betting and lottery winnings.
When you don’t pay Capital Gains Tax
You will not have to pay any capital gains tax on any profits that are within your total annual tax-free allowance. This amount is £11,100 for each person and £5,550 for trusts. Any gift given to a civil partner, husband, wife or charity doesn’t attract any capital gains tax.
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