POSTED 29 May 2018 General

Capital Gains Tax - What is it and How is it Calculated ?

Tax. We’re not here to tell you it’s fun, but if you’ve just looked up ‘What percentage is Capital Gains Tax?’ or 'Why pay Capital Gains Tax?" we can at least help by explaining it in plain English.

What is Capital Gains Tax (CGT)?

CGT is simply a tax on the profit you make when you sell something. In government speak, it’s a tax on the ‘gain’ you make when you dispose of an asset. To 'dispose of' in this context could mean selling, giving as a gift, swapping or getting compensation for something.

Widely believed myth: it’s a tax on the money you receive. No! If you buy a vase for £5000 and sell it for £5009, you only pay tax on the £9.

Widely believed truth: It involves paperwork. Alas yes. Keep dated receipts of how much you paid or received, any valuations, and records of things like Stamp Duty or compensation. You’ll have to try and replace them if you lose them.

Do I have to worry about it?

Stop reading if you’re disposing of: 

  • Personal possessions worth less than £6000
  • Your car
  • Shares that are in an ISA or PEP
  • Something to your wife, husband or civil partner (Unless you’re separated and didn’t live together for the whole tax year, or if their business sells on the asset).
  • Something to a charity. (Unless you’re making a profit and it’s selling for less than the market value).

Additionally, this also applies if you're also 'disposing' your home as long as:

  • It is your only home, and you’ve lived in it as your main home the entire time you’ve owned it
  • You’ve not used any part of it solely for business
  • You’ve never rented it out
  • The square footage takes up less than 5000 square metres, and you didn’t buy it just to sell it for profit again. 

In that case, you’re good. No need to do anything, you’ll automatically get ‘Private Residence Tax Relief’.

The following exceptions also apply:

  • You’ve made a profit from a bet, lottery or pool win. 
  • You’ve inherited an asset; though you’d pay Capital Gains Tax on it if you sold it.
  • You’re under your Capital Gains tax-free allowance of £11 700, or £5850 for trusts.

If you’ve ‘gained’ on anything other than the above, it’s called a ‘chargeable asset’, and it's best that you read on.

 capital gains hiding

How to calculate CGT

List all your gains from each asset throughout the tax year. (6th April to 5th April the year after). If you shared the asset, just work out your part of the gain.

Then the nice bit – deduct your ‘allowable losses’; these are losses you made on chargeable assets in the same tax year. The figure you end up with is your ‘total taxable gains’.

You can’t deduct losses from an asset you disposed of to a ‘connected person’. Connected people are your spouse, civil partner or siblings, parents, grandparents, children or grandchildren, and their spouses or civil partners. Business partners, any companies you control and trustees of trusts you’re close to are also ‘connected people’.Now deduct your tax-free allowance (£11,700 unless you’re a trust) from your total taxable gains. 

Obviously what you want is for all your gains to equal less than your tax-free allowance, so you don’t pay any tax at all. That’s where we have to talk about losses again. If deducting this year’s losses didn’t take you under your tax-free allowance, you’re allowed to deduct any losses you didn’t report from up to four years ago.

If it did take you under your tax-free allowance, you can carry forward the losses and use them in future years. Not that we’re glad you made any losses, you can also claim losses on assets you own that have become worthless.

Again, not exactly a ‘yay!’ situation, but every little helps. Let’s assume you’re not under your tax-free allowance, and call the figure you’re left with X. You’re going to pay Capital Gains Tax on X.

The current CGT rates

Now, if you’re a basic rate taxpayer, work out your taxable income; this is your income minus your personal allowance (Usually £11,850 but check), and any other tax reliefs you get, say for pension contributions or charity donations. 

Add X to your taxable income. If the number you get is within the basic Income Tax band, you pay 10% on gains or 18% on property. Above that, you’ll pay 20% or 28% on residential property.

If you’re a higher or additional rate taxpayer, it’s much easier; you only pay the latter rates of 20% and 28%. Lucky you.

How to pay Capital Gains Tax

If you send in an annual Self Assessment tax return anyway, you can include your Capital Gains Tax in that. If not, you can pay straight away using what the Government call their ‘real-time’ service.

To use the latter, calculate how much tax you owe, and report that to HMRC using their originally titled ‘Report Capital Gains Tax Online Service. Once you’ve been sent a payment reference number, you can use the ‘real-time’ service to pay your tax. 

The deadline is the 31st of January following the tax year in which you made the gain. So if you sold a goblet between 6th April 2017 and 5th April 2018, you’d have to have paid the tax by 31st January 2019. (That’s also the date Self Assessment tax returns have to be handed in).

NOTE: Payments online or via phone might only be processed the next day, and if the 31st of January falls on a weekend, the deadline is the Friday before. HMRC is not as relaxed as your old Geography teacher, do not hand your tax in late.

So there you go. Tax: still not fun, but hopefully comprehensible. Until next year...