Capital Gains Tax Basics
Over the next couple of months, we will be looking at Capital Gains Tax, how it works and practical applications of the rules surrounding Capital Gains Tax.
The first thing to understand is that Capital Gains Tax (CGT) is calculated in the following way:
Money received – Money Paid = Profits x Rate
i.e. CGT is levied on the profits you make from disposing of the assets and not the sales price.
Disposing means selling, giving away or transferring to someone else, swapping it and getting money for it i.e. insurance pay-outs.
Money paid or costs that can be deducted for the money received are legitimate costs; like the cost of buying the asset, improvements costs, costs involved in selling the asset, solicitors fees, broker fees etc.
Money received means the sales prices and if no money was received, the market value at date of disposal/sales date.
CGT is taxed at 10% for basic taxpayers and 20% for higher taxpayers for assets other than property. On property, Capital Gains are taxed at 18% for basic taxpayers and 28% for higher taxpayers respectively.
If you sell artwork or an asset (excluding a car) for £6000 or more, you need to declare and pay CGT on this sale of asset.
Every individual receives in 2020 a £12300 CGT allowance per year; this cannot be carried over to following years. If you are a married couple and you own the asset jointly, you can receive a CGT allowance of £24600 per year.
From April 2020, if you sell an asset and have to pay CGT, you need to declare and pay this within 30 days of date of sale. The payment made is a payment on account and when you file your 2020/2021 self-assessment, the CGT information has to be included again and the prepayment made will be taken into account as a tax paid in advance.
If you sell your main home or family home, the asset will qualify for Private Residence Relief, or PRR. This means you will not pay CGT on the sale of your family home.
If you don’t live in your main home any more and you have been renting out this house, you can still receive an exemption but the period that you rented out the house will not qualify for PRR. There is a great example in the Guardian.
Remember that CGT is also payable on all foreign assets sold, and tax paid in another country will be included as tax credits. If you are lucky enough to own a house abroad and you spend a few months in your UK house and a few months in your other house, you need to decide which house is your main property. The second property will be treated as an investment property for CGT purposes if you then sell it.
We will continue next month with CGT on your property and exemptions i.e. letting relief and how to offset your losses in your property portfolio against the gains made on other property.