What Does the Term “Capital Gains Tax” Mean in Accounting
If you own second homes, antiques, stocks, and/or other assets and decide to sell them, you may be subject to a tax obligation. This is based on the premise that you will be compensated. Any money you acquire could be considered a gain, and calculating the Capital Gains Tax (CGT) you must pay can be a difficult task.
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What is Capital Gains Tax?
CGT is a tax on the profit you make when you sell something you own. It’s based on the profit made, or the difference between the sale price and the acquisition price, for an asset owned for more than a year.
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It usually applies to the following situations:
- Shares
- Funds for investment
- The second set of characteristics
- Inherited characteristics
- The sale of a company
- Art, jewellery, and antiquities are among the valuables.
- Assets sold for less than their market worth
Currently, capital gains on certain assets are taxed at a different rate than income tax. This is because buying such assets is perceived as a risk, whether entrepreneurial or investment-related, and the added risk carries a higher potential gain.
How much does Capital Gains Tax cost in the United Kingdom?
The CGT rate you pay is determined by two factors:
1. Whether you pay tax at the basic, higher, or additional rate
2. The kind of asset you’ve sold
When must Capital Gains Tax be paid?
CGT is more complicated than simply disclosing your gain and applying the appropriate rate. The yearly CGT allowance of £12,300 is the first. This is the maximum profit you can make before paying CGT. There is no CGT liability if your gains in the tax year are less than this amount. However, if you don’t use the allowance while selling your assets, you won’t be able to carry it forward to the next year.
What is the capital gains tax and how does it work?
You must apply the appropriate rate to the gain you made on the asset(s) in question if your gains exceed the yearly allowance. You can both use your allowances if you hold an asset with another person, such as in a marriage. This implies that if you earn a gain on the sale of a second home, for example, you can double your gain to £24,600 before CGT kicks in.
To help decrease your CGT burden, you can transfer assets between partners in a marriage or civil relationship. If you transfer an item to a partner and then sell it for a profit, the amount of CGT you owe will be calculated based on the total amount of time you possessed the asset as a partnership, not the date it was transferred to your partner.
It’s worth noting that this should only be done after seeking specific guidance, as other reliefs may be available.Assets that can be charged
If the asset in question is a chargeable asset, capital gains tax is due. Personal items worth more than £6,000, any property that is not your primary residence, shares (except than those held in a tax-free plan or investment), and business assets are all chargeable assets.
Costs that are allowable
You subtract any permissible costs when calculating the chargeable gain. These costs include not just the cost of purchasing the asset in the first place, but also any incidental costs of buying and selling the item, such as advertising, commission, and so on, as well as any money spent to improve the asset’s worth.
Losses
Losses are calculated in the same way that profits are. Losses and gains from the same tax year are added together to determine the net gain for the year. If you have a net loss, you can carry it forward and use it to offset future gains.
Amount of money exempt each year
Everyone is entitled to an annual exempt amount. This has been fixed at £11,300 for 2017/18. The number for 2016/17 was £11,100.
The annual exempt amount is calculated based on the year’s net gains (gains less losses). Once the annual exemption has been applied, any brought forward losses can be utilised to hide any leftover gain.
Unused amounts cannot be carried forward if the annual exempt amount is not used in the tax year in issue.
Rates
For 2017/18, capital gains tax is due at a rate of 10% if total taxable income and gains do not exceed the basic rate band of £33,500, and at 18% if they do. Gains on property (when not exempt) and carried interest are taxed at higher rates of 18% and 28%, respectively.
Spouses
Transfers between spouses and civil partners are considered to be at a value that does not result in profit or loss. This means that assets can be transferred tax-free between spouses and civil partners prior to a sale to a third party, allowing you to take benefit of an unused annual exempt amount.
The regulations governing capital gains taxes can be complicated. Professional guidance should be sought as soon as possible, ideally before the disposal.