What is Capital Gains Tax
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Capital Gains Tax
Capital Gains Tax is a tax that is charged on the profit you make after selling something that belongs to you. It is important to note that the tax is levied on the profit you realise, and not on the amount you receive from the sale. Disposal can take the form of selling, giving away, exchanging it for something else or even getting an insurance compensation for it.
Profits on the disposal of most assets are subject to capital gains tax. Your tax bracket and the type of asset from which you make a profit determine how much capital gains tax you pay. The amount of capital gains tax allowance for that particular year is another determining factor.
Assets with an expected life of fewer than 50 years could be subject to further taxation rules. The tax becomes due when you dispose of the asset. Some of the common chargeable assets include most personal possessions that are worth £6,000 or more. Residential property that is not your main home is also a chargeable asset.
If you let out your primary home or use it for business, it becomes a chargeable asset for capital gains tax purposes. Shares that are not in an ISA or PEP and business assets are also common chargeable assets. There are, however, some tax-free assets. These include your car that is for personal use, the main residential home that you own and personal items sold for less than £6,000. You also do not pay tax on gifts to or from a spouse or civil partner. Gifts to a charitable organisation are also considered tax-exempt.
You are only required to pay Capital Gains Tax on the total profit above your capital gains tax allowance.
The capital gains tax allowance is £11,700 for the tax year 2018-19 and £12,000 for the tax year 2019-20.
The tax-free allowance for trusts it is £5,850 for the year 2018-19.
Capital Gains Tax Rates
Residential property is subject to a tax rate that is different from that of other assets. The tax rate also depends on your taxable income.
If your total taxable income, including the taxable capital gain, is within the basic income tax band. You are required to pay 18% on your gains from residential property or 10% on gains from other chargeable assets. If your total taxable income is above the basic income tax band, you are required to pay 28% on your gains from residential property or 20% on your gains from other chargeable assets. In the case of sole entrepreneurs or partners in a partnership business, the rate is 10%, and you qualify for entrepreneur’s relief. The tax rates above apply for the tax year 2018-19.
If you dispose of an asset that is jointly owned with another person, you are allowed to use both of your allowances, which thereby doubles the amount of capital tax gains you can make without having to pay capital gains tax.
If you transfer assets to someone you are married to or in a civil relationship with, there is no capital gains tax chargeable. However, if such assets are later sold to other parties, capital gains are calculated based on the period you owned the assets as a couple. Unused capital gains tax allowances for any particular year cannot be carried forward to any other year.
In the sale of a gift from other people other than your spouse, a valuation of the gift at the time it was gifted is done, and if there is a gain, capital tax gain is charged accordingly. Such gifts can be subject to tax relief, and it is advisable to speak to an accountant about it.
Capital gains tax on inherited assets becomes due when you sell the asset, which means you are not required to pay any Capital Gains Tax when you inherit the assets. You will need to get its valuation at the time you inherited it, compare it with its current value and determine whether there is a capital gain. Keeping records of these assets is advised because you might need such documents for valuation or while buying insurance for such assets.