Tax & Admin

A Guide to Capital Gains Tax

Business Advice | 2 November 2022 | 2 years ago

Capital Gains Tax is paid on assets that are sold, swapped for something else, transferred to someone else or given away as a gift. You also pay Capital Gains Tax on assets that you are receiving compensation for, such as an insurance payout if it’s been lost. This guide to Capital Gains Tax will detail everything you need to know about this complex area of finance.

What is Capital Gains Tax?

Capital Gains Tax is a tax which is paid on the profit you make when you sell something that has increased in value. When you sell or dispose of an asset, you pay Capital Gains Tax on the gain that you have made, not the amount of money you receive for the asset.

How Does Capital Gains Tax Work?

If you bought an asset for £5,000 and sold it for £25,000 a few years later, you have made a profit of £20,000. This profit is a gain, and therefore you must pay Capital Gains Tax on the £20,000 profit.

Capital Gains Tax must be paid on a variety of assets including personal possessions worth more than £6,000, property, shares that are not in an ISA or PEP, your main home if you have let it out or used it for business and business assets. Some assets are tax free and you do not pay Capital Tax Gains on them. For example, you don’t pay Capital Gains Tax on your main home, your car or lottery winnings. You also do not pay Capital Gains Tax on gifts to your husband, wife, civil partner or a charity.

How Much is Capital Gains Tax?

The amount of Capital Gains Tax you pay depends on how much Income Tax you pay. If you are a higher or additional rate taxpayer, you pay a rate of 28% on gains made from a residential property, and 20% on gains from other assets. If you are a basic rate taxpayer, the rate you pay depends on the size of the gain, your taxable income and where the gain is coming from.

Capital Gains Tax Strategies

Everyone is entitled to a Capital Gains Tax-Free Allowance of £12,300 and £6,150 for trusts, but there are other strategies you can use to reduce the amount of tax you need to pay. For example, if you invest in shares and bonds through funds, you don’t pay Capital Gains Tax on any of the gains that the fund makes when buying and selling, as it’s the fund that’s doing the selling.

You could also make use of a tax deferred retirement plan, which allows you to postpone the tax you pay on invested money until it’s withdrawn, which is after you have retired. Another option is to report a loss that you have made to reduce your total taxable gains, and this amount is then deducted from the gains you made in the same tax year.

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