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What is Capital Gains Tax (CGT)?

What is Capital Gains Tax (CGT)?

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Understanding Capital Gains Tax (CGT)

Capital Gains Tax (CGT) is a tax levied on the profit made from selling certain types of assets in the UK. It applies when you sell an asset for more than you paid for it. The profit made from this sale is considered a "capital gain" and is subject to taxation.

This tax applies to individuals, trustees, and personal representatives. However, companies pay Corporation Tax on their profits, including any capital gains, rather than CGT.

Assets Subject to CGT

CGT applies to a variety of assets, including property, stocks, and shares. The tax also covers personal possessions worth over £6,000, excluding cars. Some intangible assets, like patents and trademarks, may also be subject to CGT.

There are specific exemptions and reliefs for certain assets. For example, your primary residence is usually exempt from CGT, thanks to Private Residence Relief. This significantly reduces or entirely eliminates the CGT liability on your home.

Calculating Capital Gains Tax

To calculate CGT, subtract allowable expenses and your purchase price from the sale price to determine the gain. Each individual taxpayer has an annual tax-free allowance, known as the Annual Exempt Amount. For the tax year 2023/24, it is £6,000 for individuals.

Any gains above this exemption are taxed at a rate depending on your income tax band. Basic rate taxpayers pay 10% on gains, while higher rate taxpayers pay 20%. Gains from residential property are taxed at 18% or 28%, depending on the income tax band.

Exemptions and Reliefs

Several exemptions and reliefs can reduce your CGT liability. Besides the primary residence exemption, gifts to your spouse or civil partner are typically exempt from CGT. This intra-spousal transfer allows for tax planning opportunities.

Investors may benefit from the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS). These schemes may provide reliefs that reduce or defer CGT on qualifying investments, encouraging investment in small and growing businesses.

Reporting and Paying CGT

You must report any taxable gains to HM Revenue and Customs (HMRC). This can be done using the Self Assessment system. If you don't usually file a tax return, you must use the real-time Capital Gains Tax Service. Reporting must be done within certain deadlines to avoid penalties.

Taxpayers typically have to pay CGT by 31 January following the end of the tax year. For residential property sales, the payment deadline is stricter, requiring payment within 60 days of completion.

Frequently Asked Questions

What is Capital Gains Tax (CGT)?

Capital Gains Tax is a tax on the profit gained from the sale of an asset or investment that has increased in value.

When do you have to pay Capital Gains Tax?

You must pay Capital Gains Tax when you sell or otherwise dispose of an asset and make a profit on the sale.

Which assets are subject to Capital Gains Tax?

Assets that are typically subject to CGT include stocks, bonds, real estate, and other investments.

How is CGT calculated?

CGT is calculated based on the difference between the sale price and the purchase price of the asset, adjusted for any allowable expenses or tax reliefs.

Are there any exemptions to CGT?

Yes, certain assets like your primary residence, personal belongings under a certain value, and cars are usually exempt from CGT.

What is the CGT rate?

CGT rates can vary based on the type of asset, the length of time it was held, and the country’s tax laws. They can be a flat rate or based on your income tax bracket.

How can I minimize my CGT liability?

You can minimize CGT by taking advantage of reliefs, holding assets longer term, utilizing tax-efficient accounts, or offsetting gains with losses.

What is the tax year for CGT?

The tax year may differ by country. For example, in the UK, it runs from April 6th to April 5th of the following year.

Is CGT the same as income tax?

No, CGT is specifically levied on gains from the sale of investments or assets, whereas income tax is on earnings from employment or other income sources.

Do businesses pay Capital Gains Tax?

Yes, businesses can be subject to CGT when they sell assets, although they may have different rates or reliefs than individuals.

Can I carry forward losses to offset against future gains?

Yes, capital losses can often be carried forward to offset against future capital gains, reducing CGT liability.

What records should I keep for CGT purposes?

Keep records of purchase and sale documents, receipts for improvements, and any other relevant information to substantiate your tax calculations.

What is an annual CGT allowance?

An annual CGT allowance is the amount of profit you can make before CGT is payable. This varies by country.

How does CGT differ for short-term vs long-term investments?

Some jurisdictions have different tax rates for short-term vs long-term capital gains, incentivizing holding assets longer.

Do you have to pay CGT on cryptocurrencies?

Yes, in many countries, cryptocurrencies are considered assets and are subject to CGT when sold for a profit.

How do inheritance and gifting affect CGT?

Transferring assets via inheritance or gifting can trigger different tax treatments, potentially resulting in CGT or exemptions.

What is 'step up in basis' for CGT?

'Step up in basis' is a provision that revalues the asset at current market value at the time of inheritance, potentially reducing CGT upon sale.

Are there deadlines for paying CGT?

Yes, there are deadlines for reporting and paying CGT, which vary by jurisdiction, such as upon filing your tax return.

What happens if I don't report Capital Gains?

Failing to report capital gains can result in penalties, interest charges, and potential legal action from tax authorities.

How do international investments affect CGT?

International investments can complicate CGT due to varying tax laws and exchange rates, and may require consideration of any double taxation agreements.

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