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Individuals are liable to capital gains tax when they dispose of a specific type of asset at profit. It may however be possible to take some or even all of these earnings tax-free by virtue of any applicable capital gains allowances, known as exemptions.
Capital gains tax is generally payable on disposals of chargeable assets made by an individual, partnerships or most forms of trust.
Companies and other collective bodies instead pay corporation tax on their gains, albeit the capital gains rules will usually apply in determining the profit so taxable.
An individual’s chargeable assets would include:
A number of items are fully exempt from capital gains tax:
CGT is payable at the relevant rate on the gain itself arising from the disposal of the chargeable asset. Importantly – this only applies where total gains on disposal exceed your annual tax-free allowance, the Annual Exemption Amount.
Which means it is only at the point that your overall annual gains go above the Annual Exempt Amount that you start to pay Capital Gains Tax.
Currently you are permitted the following gains tax-free within the same tax period:
Each individual in a marriage or civil partnership is entitled to the full annual exemption.
Note that capital gains annual exemptions cannot be carried forward or back; if you do not use it for a year, it is lost.
The capital gains annual exemption essentially allows you to make a certain amount in capital gains each year on specified assets before any tax is due.
Gains are determined by subtracting your purchase price from the sale price, less any permitted deductibles for the particular asset.
The rate of capital gains tax you pay on that figure will be determined by whether you are a higher- or basic rate taxpayer.
If you are a higher rate taxpayer, total gains – less capital gains allowances – will be taxed at 28% for residential property and 20% for all other chargeable assets.
If you are a basic rate taxpayer, to establish the applicable CGT rate, you first need to calculate your taxable income (income less personal allowance and other relevant reliefs). Add to this your total gains (less capital gains annual exemption). If this figure is below the level for basic rate income tax, the applicable CGT rate will be 18% on residential property and 10% on all other chargeable gains. Once you exceed the basic rate, you will be taxed at the higher rate, as above.
For trustees or sole traders, the rates are 28% for residential property, 20% on other chargeable assets, and 10% where gains qualify for Entrepreneurs’ relief.
|Taxpayer||Capital gain||Rate pre April 2016||Rate as of April 2016|
|Basic rate tax payers||On profits made from assets such as stocks and shares||18%||10%|
|Higher rate tax payers||On profits made from assets such as stocks and shares||28%||20%|
|Basic rate tax payers||On property not qualifying as main residence/td>||18%||18%|
|Higher rate tax payers||On property not qualifying as main residence||28%||28%|
Important points to note:
Marriage and civil partnership
If your assets are owned jointly with your spouse or civil partner, you can use both of your annual exemptions. This effectively doubles the amount you can make before CGT is due.
However, if you choose to transfer any of your assets to your spouse or civil partner, it must be an outright gift, with ownership of the share transferred and, of course, your partner can choose what they do with their share!
Gains from a combination of assets
If you have gains from both residential property and other assets, you can use your tax-free allowance against the gains that would be charged at the highest rates (for example where you would pay 28% tax).
Disposal at a loss
If you dispose of a chargeable asset at a loss, the loss can be offset against your annual gains as an ‘allowable loss’.
This means if your total taxable gain is still above the tax-free allowance, you can deduct unused losses from previous tax years. If your gain is then reduced to the tax-free allowance, you can carry forward the remaining losses to a future tax year.
To do this, report the loss to HMRC on your tax return against the chargeable asset within 4 years after disposal.
If you dispose of an asset of value, it is important to calculate your capital gains – and all related – tax liability correctly to avoid any potential issues arising with HMRC.
Depending on your circumstances, you may also be able to reduce your tax bill by for example deducting losses or claiming other reliefs.
ETC can advise individuals on all aspects of capital gains tax, including capital gains allowances relating to the disposal of assets. We can help you meet liabilities in a tax-efficient manner by identifying the options available to you.
Our services include:
For more information about capital gains allowances, or capital gains tax liability and reliefs in general, please contact one of our chartered tax advisers.