Individuals: How gains are taxed? What is a Capital Gains Tax in the UK?

Updated: Feb 23

20 February 2022

Capital Gains Tax (CGT) is a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value. It’s the gain you make that’s taxed, not the amount of money you receive. For example, if you bought an asset for £10,000 and then sold it for £15,000 you made a gain of £5,000 (£15,000 minus £10,000).


You pay CGT on the gain when you dispose of the asset. Disposing of an asset includes not only selling it but also


· giving it away as a gift, or transferring it to someone else

· swapping it for something else

· getting compensation for it - like an insurance payout if it’s been lost or destroyed


CGT is due on the gain when you dispose of ‘chargeable assets’ which include:


· most personal possessions worth £6,000 or more, apart from your car

· property that’s not your main home

· your main home if you’ve let it out, used it for business or it’s very large

· shares that are not in an ISA or PEP

· business assets


You only have to pay Capital Gains Tax on your overall gains above your tax-free allowance (the ‘Annual Exempt Amount’). For 2021-2022 the Capital Gains tax-free allowance is:


· £12,300

· £6,150 for trusts


Usually there is no need to pay tax on gifts to your husband, wife, civil partner or a charity. (For further details please see What is an inheritance tax (gift tax or alternative tax if relevant) in the UK? How does it work? )


Tax rates

If you pay basic rate Income Tax, you’ll pay:


· 10% on your gains

· 18% on residential property.


If you pay higher rate Income Tax you’ll pay:


· 28% on your gains from residential property

· 20% on your gains from other chargeable assets


How to calculate the tax due

1. Work out how much taxable income you have - this is your income minus your Personal Allowance and any other Income Tax reliefs you’re entitled to.

2. Work out your total taxable gains.

3. Deduct your tax-free allowance from your total taxable gains.

4. Add this amount to your taxable income.

5. If this amount is within the basic Income Tax band you’ll pay 10% on your gains (or 18% on residential property). You’ll pay 20% (or 28% on residential property) on any amount above the basic tax rate.


Example

Your taxable income (your income minus your Personal Allowance and any Income Tax reliefs) is £20,000 and your taxable gains are £12,700. Your gains are not from residential property.


First, deduct the Capital Gains tax-free allowance from your taxable gain. For the 2021 to 2022 tax year the allowance is £12,300, which leaves £400 to pay tax on.


Add this to your taxable income. Because the combined amount of £20,400 is less than £37,700 (the basic rate band for the 2021 to 2022 tax year), you pay Capital Gains Tax at 10%.


This means you willl pay £40 in Capital Gains Tax.


For further information on any of the points above, please, contact

Yuliya Shved at: yuliya@lexefiscal.com or

Dr Clifford J Frank at: clifford.frank@lexefiscal.com

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