What is Capital Gains Tax?
Capital Gains Tax is applicable when you are selling something you own and you are making a profit out of it. The important thing to remember is that this tax will be computed based on the profit you make and not on the amount that you have obtained from selling it. As what the name says, it’s all about the gain!
Essentially, Capital Gains Tax is all about the tax on any profit that you’ve acquired upon the sale of an asset and it usually applies to almost any assets when they are sold. However, there are a few exceptions, for example, there is no need of paying Capital Gains Tax if you are selling your main residence or other personal possessions that are sold for £6,000 or below.
There are some complicated rules for assets which are having an expectancy life of below 50 years. If you need some help on this, then you should seek some expert advice.
Generally, Capital Gains Tax can also be applied on assets which are acquired as gifts from others, although, not necessarily from your spouse or civil partner. It is required that there should be some valuation on the assets, in order to determine its value at the time when it was gifted. In the event that capital gain may arise upon disposing of the asset, then tax will be applied. However, tax relief can be availed for gifts. If you need more advice on this, then you should talk to an accountant.
You don’t have to pay Capital Gains Tax if you have inherited the asset. However, if you are planning to sell it, then you need the identify its value at that time that you have inherited the asset. This will permit you to compute and if needed report any capital gains on your tax return. Always keep a record of these assets since you will be needing them in case you decide to sell them. This information is also very useful if you want to let your insurers know that you have inherited some valuable assets.
How Much Profit Is Required Before Paying Capital Gains Tax (CGT)?
For the 2020/21 tax year, the tax-free allowance on Capital Gains is £12,300. This shows an increase from the amount of £12,000 in the 2019/20 tax year.
Most types of Capital Gains Tax can be paid as part of your annual Self Assessment. Nevertheless, if you are paying Capital Gains Tax as a result of selling one of your properties which is not deemed as your main residence, then from April 6, 2020, you are obliged to make a payment to HMRC within 30 days starting from the date of disposal.
If you have not yet accomplished a Self Assessment, then you should register with HMRC on October 5th after the end of the tax year that is questionable. This can allow you to submit one.
Capital Gains Tax Rates
The tax rate for your Capital Gains will likely depend on the entire amount of your taxable income as well as the marginal rate of your personal tax. Hence, this is something that you have to work out first. For the tax years 2019/20 and 2020/21, here are the Capital Gains Tax rates that you have to use:
10% or 20% tax rates are applicable to individuals excluding residential properties.
20% tax rate is applied either for trustees or for individual representatives of someone who has died excluding residential properties.
18% or 28% tax rates are used for individuals for residential properties as well as carried interests.
28% tax rate is intended for trustees or for private representatives of someone who has died for selling residential properties.
10% tax rate is used for gains that qualify for Entrepreneurs’ Relief.
Profits On Selling or Disposing of Foreign or Overseas Assets
You still might need to pay Capital Gains Tax no matter if your assets are located abroad or overseas. Whether you are a UK tax resident or not, this can likely influence the tax that you pay as well as if you are qualified for any allowances or exemptions.
Furthermore, Capital Gains Tax also has some special rules for UK residents that are not domiciled in the UK. This means that you are working in another country and earning your income there. If you need some help in understanding your own personal situation, then you should talk to an accountant.
Other Rates and Thresholds
There are various tax rates that are available in the UK, which are applicable to individuals and businesses. If you are a business owner, then most likely you will be affected by all of them.