Capital gain tax is also known as CGT can be an intimidating subject to understand.
What is a chargeable capital gain?
As the name suggest capital gains tax is a tax on you guessed it capital gains. Capital is wealth in the form of money or property that is used to make more wealth, and a gain is the increase in the value of that wealth.
Capital gain tax was first introduced in the UK in 1965.
And a CGT liability may arise when a chargeable person makes a chargeable disposal of a chargeable assets.
But what is a chargeable person asset and disposal exactly?
An individual to whom an increase gathered was chargeable to burden – ordinarily the individual who discarded the entire or part of the property, or interest in the property, subject to ATED. On the off chance that the property was possessed by an organization the chargeable individual was that organization.
Who is chargeable to capital gain tax?
- You become chargeable to capital gain tax, if you are an individual who is UK tax resident.
- You are a trustee of a trust or a settlement.
- You are a personal representative of a deceased person.
- You are a business partner in a partnership.
Companies such as limited companies and limited liability partnerships are noy subject to capital gain tax, but pay corporations tax instead on any chargeable gains of disposal of assets held within a company.
Other organizations such as registered charities, local authorities, amateur sports clubs, health service bodies, and registered pension scheme to name a few, are all exempt from capital gain tax subject to certain restricts.
When is CGT charged and What are the rates?
In very basics terms if a chargeable asset is sold for more than the purchase price, profit has been made and so a capital gain arises.
Its important to note that only the gain or profit is taxed not the full amount received. And don’t forget a capital loss can also happen. This is when the reverse situation happens and the disposal proceeds are less than the cost of the asset thus resulting in a loss.
Capital losses don’t have to be wasted and can be used smartly to reduce your overall tax bill in the right circumstances.
Let’s illustrate capital gain with an example,
If you as a UK resident individual bought some listed shares says for 1000 pounds on the 1st of January ,2021. And went on to sell them for 6000 pounds on the 30th of June,2021, the chargeable asset is the listed shares, the chargeable person is you, the UK resident individual and the chargeable gain in this simple example is 5000 pound ignoring the annual exemption and other deductible costs.
Remember it is not the full 6000 pounds that is subject to capital gains tax, only the gain so 5000 pounds in this case. Now, because the chargeable asset was disposal on the 30th of June 2021, it has to be declared and reported in the 2021,22-tax year self-assessment returns.
And what’s more it is the net gain that is subject to capital gains tax. So, in our example above, let’s suppose you incurred 500 pounds in broker fees to sell your listed shares. You can deduct this cost plus any other incidental costs relating to the disposal and allowable expenses. Therefore only 4500 will become subject to capital gain tax.
The current capital gain tax rates in 2020 to 2021 are as follow;
- Residential property for an individual basic rate taxpayer is 18% and for a higher rate taxpayer it is 28%.
- And the main CGT rate which applies to most other assets is 10% for basic rate taxpayers and 20% for higher rate taxpayer.
The annual and other exemptions:
Mostly individuals are entitled to an annual exemption for CGT purposes. For 2020-2021 the exemption is 12,300 pounds for the year. The annual exemption means that no CGT is payable on gains up to that amount each year.
And the good news is if you have generated a total capital gain of up or less than the 12,300-annual exemption, than you don’t have to formally declare a report your capital gain to HMRC.
Spouses and civil partners also have an annual exemption. So, for jointly held assets, there is scope for exemption 24,600 pounds worth of gain in 2021. The same principle applies for future tax year so long as the annual exemption is not taken away by the chancellor. The annual exemption is applicable to the current tax year only on a use it or lose it basis. It cannot be carried forward or taken back.
So, anyone planning to make a series of disposals should considers timing the sale between two or more tax years, to use as much and as many annual exemptions as possible.
Of course, this is only possible with certain assets such as shares and is far more difficult to do with assets such as residential or commercial property. Now, if you’re a trustee then you are entitled to an annual exemption equal to one half of the exemptions available to an individual.
So, for the 2020 to 21 tax year this is 6150 pounds. However, trustees of settled property held for people with disabilities, or other in recipients of attendance allowance or disability living allowance are entitled to the full annual exemption.
