Definition of Capital Gains Tax (CGT)
Capital Gains Tax (CGT) is levied on the profit resulting from the sale of certain types of assets. It is crucial to note that the tax is only charged on the gain, not the entire amount received from the sale. In the UK, CGT applies to the net chargeable gains within a fiscal year after the subtraction of any allowable capital losses. Various allowances and exemptions may reduce the taxable amount. Over the years, CGT rates have varied dependent on factors like the type of asset and total taxable income of the individual during the tax year.
Examples of Capital Gains Tax
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Selling Shares:
- If an investor bought shares for £5,000 and sold them for £15,000, the capital gain would be £10,000.
- After applying any allowable losses and the annual allowance (if applicable), the remaining amount would be subject to the CGT relevant rate.
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Disposal of Property:
- If an individual sold a second home, bought for £200,000, for £300,000, the gain would be £100,000.
- This gain, subject to any allowances or exemptions, would be taxed at the applicable residential property CGT rates (18% or 28%).
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Business Asset Disposal:
- If a business owner sold a piece of machinery for more than its purchase price, any gain after subtracting costs and allowable expenses would be subject to CGT.
- Entrepreneurs’ Relief could potentially apply, providing a reduced tax rate on these gains.
Frequently Asked Questions (FAQs)
What is considered a chargeable gain?
A chargeable gain is the profit from selling or disposing of an asset where the sale proceeds exceed the initial purchase price and any allowable expenses.
What is the personal allowance for Capital Gains Tax?
For the tax year 2016-2017, the personal allowance (annual exempt amount) for CGT was £11,100. This amount can vary from year to year.
Are there any types of assets exempt from CGT?
Yes, several assets are exempt, including private cars, personal possessions worth less than £6,000, and proceeds from ISAs (Individual Savings Accounts).
How are CGT rates determined?
CGT rates depend on the total taxable income and the type of asset sold. From April 2016, lower rates of 10% or 20% applied, except for gains from the sale of residential properties which were taxed at 18% or 28%.
Can capital losses be used to offset gains?
Yes, allowable capital losses can be deducted from chargeable gains in different tax years to reduce the amount subject to CGT.
Is there any relief for business asset disposal?
Yes, Entrepreneurs’ Relief allows certain qualifying business disposals to benefit from a reduced CGT rate of 10% up to a lifetime limit.
What records do I need to keep for CGT?
It is essential to maintain detailed records of all asset purchases and disposals, including costs, sale proceeds, and any costs related to the sale.
Related Terms
- Chargeable Gains: The profit from the sale of an asset after allowable expenses and any applicable reliefs are deducted.
- Capital Losses: Losses which occur when an asset is sold for less than its purchase price. These can be offset against chargeable gains.
- Entrepreneurs’ Relief: A relief that provides a reduced CGT rate of 10% on the disposal of qualifying business assets.
- Chargeable Assets: Assets that are subject to CGT, which can include securities, investment properties, and business assets.
Online Resources
Suggested Books for Further Study
- “Capital Gains Tax: A Complete Guide” by Len Sealy
- “Taxation of Capital Gains” by Michael A. Bradley
- “UK Taxation and Tax Aspects of Selling Businesses” by Jo Haigh
- “Tax Law: An Inventory of UK Capital Gains Tax” by Julie Stone
- “Principles of Taxation for Business and Investment Planning” by Sally M. Jones
Accounting Basics: “Capital Gains Tax (CGT)” Fundamentals Quiz
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