What is Capital Gains Tax?
A capital gain occurs when you sell something for more than it was worth when you acquired it. Capital Gains Tax (CGT) was first introduced in 1965 and is charged on gains realised on the disposal of assets. This includes any occasion when the beneficial ownership of part or all of an asset is transferred from one person to another (usually excluding transfers between married partners and registered civil partners). Examples include sales, gifts, and exchanges but the death of an individual is not treated as a disposal for CGT purposing. Typical assets are investments, land and other tangible items of wealth like works of art, but also include intangible items of wealth like the goodwill of a business.
The capital gain is broadly the difference between the disposal proceeds and the cost of acquiring the asset. In some circumstances, the market value of the asset at the time of acquisition/disposal is used.
Capital Gains Tax (CGT) is one of those taxes that tends to cause people little concern until they dispose of assets of a value above their annual exemption, currently £11,100 a year.
It is worth noting that over recent years the amount of revenue HMRC has raised through CGT has been rising. In addition, the number of people who have found they are liable to pay this tax has increased also. This is similar to Inheritance Tax (IHT) receipts and the number of people falling into the IHT bracket.
Figures for the 2014-15 tax year show that capital gains liabilities of UK taxpayers increased by 25% to £6.9bn from the previous year’s figure of £5.5bn. The total number of capital gains taxpayers also increased by 13 per cent over this period, up to 242,000 from 214,000. That is expected to have increased when the 2015-16 figures are published.
HMRC stated that rises are likely to be related to increases in house prices, the number of house transactions and the prices of equities since the previous year, which will have led to an increase in the value of chargeable gains – as CGT is charged on the profits made when certain assets are sold or transferred.
In April 2016, the capital gains tax rates were cut by 8 per cent for shares within funds, and now stand at 20 per cent for the higher rate band and 10 per cent for the basic rate, excluding gains on buy to let property or second homes. CGT is clearly affecting more and more people and anyone planning to sell second homes, shares andother investments in the years ahead, should bear this in mind.
There are various reliefs and exemptions which may reduce the amount of CGT to be paid – alongside the annual exemption amount, normally there is no CGT liability on the disposal of a person’s main or only home, for example.
Through selected investments and structured disposal of assets, it is possible to reduce the potential liability but it requires careful financial planning to maximise exemptions and tax wrappers such as ISAs. Ideally, investors should be aspiring to pay CGT over income tax, because of the lower rate of tax payable.