Capital Gains Tax

What is Capital Gains Tax?

Capital Gains Tax or CGT refers to the taxes that need to be paid on the profits you earn when you sell assets that have grown in value from the time you purchased them. It doesn’t always have to be a sale – it could also be a swap, gift, or transfer of ownership to someone else.

For instance, let’s say you paid £10,000 to acquire a painting on your favorite local artist 10 years ago. However, now, he’s an international sensation and his paintings regularly go on sale for £100,000+ figures. You’re suddenly in a tight cash crunch and need money – so you decide to sell the painting. A buyer approaches you, promising to pay £110,000 for your painting, thus netting you a cool £100,000 in profits. Taxes are levied on the profit portion only, i.e., £100,000.

Bear in mind that if you were gifted the painting from a family member or received it as part of your inheritance, you are still required to pay CGT when you dispose of it.

What Items Attract Capital Gains Tax?

Business assets like buildings and land, registered trademarks and shares, fittings and fixtures.

Company shares, other than those locked in a PEP or ISA

Residential or commercial property.

Personal possessions like jewelry, art, and antiques.

However, several items do not attract CGT:

Winnings from pools, lotteries, or betting

UK premium bonds and government gilts

PEPs and ISAs

Gifts donated to a charity, unless such gifts were sold for a price greater than what you paid for them but lower than prevailing market value

Gifts given to your civil partner or spouse. However, gifts that were sold in due course of the spouse’s business or gifts made during the year of legal separation do not count.

How Much Capital Gains Tax Do I Need to Pay?

There are 2 different CGT rates. The rate that applies to you is dependent on a variety of factors, including:

Totals gains made

The item that you’re disposing of

Your current income tax rate

You are liable to pay Capital Gains Tax whenever you sell valuable assets like property, art, cryptocurrencies, or shares.

However, a sale of your primary residence doesn’t usually attract CGT. You must satisfy a list of conditions to qualify for ‘private residence relief’.

For F.Y 2019-20, CGT rates are as follows:

For taxpayers with an annual income of less than £50,000, a CGT rate of 10% is levied on all their capital gains transactions (Shares, cryptocurrency, art, etc.). However, the sale of residential property attracts an 18% CGT rate.

For taxpayers with an annual income of more than £50,000, a CGT rate of 20% is levied on all their capital gains transactions (Shares, cryptocurrency, art, etc.). However, the sale of residential property attracts a 28% CGT rate.

All individuals are entitled to a capital gains tax exemption of £12000, which means that your capital gains are completely tax-free up to £12000. For trusts, this capital gains tax threshold has been reduced to £6000.