CAPITAL GAINS TAX (CGT)
What is CGT?
Capital gains tax is levied on disposals of qualifying assets, where the seller has benefited from an appreciation in the value of the asset which is being disposed of.
An example of a common asset upon which individuals might suffer a CGT liability, is shares - when an individual sells shares and makes a profit (or chargeable ‘gain’) on the disposal – if the chargeable gain is above a certain threshold, they will need to pay CGT to HMRC.
You pay CGT on the ‘gain’,
not the proceeds
It is important to understand that an individual will only pay CGT on a ‘chargeable gain’ i.e. the increase in value of the asset between the date when it was purchased, and the date it was sold. You will not pay CGT on the proceeds received when selling an asset.
How do I calculate by CGT liability?
Unfortunately, calculating the gain liable to CGT is not as straight forward as A – B = C…. in fact, there a number of factors to consider even before you get into the numbers, including:
What meets the definition of a ‘disposal’ for CGT purposes - this doesn’t just include selling an asset, but also applies to:
Gifting assets (further rules apply depending on who the recipient of the gift is, or the circumstances surrounding why the gift was made e.g. upon death)
Receiving compensation for lost of destroyed assets
Exempt assets (those not chargeable to CGT, regardless of the method of ‘disposal’ - certain assets do not qualify for CGT and are therefore exempt or ‘outside the scope of CGT’.
Allowance - each year, individuals receive an allowance for CGT purposes, which entitles them to realise chargeable gains, tax-free, up to a certain limit. The current Annual Exempt Amount (for tax year 18/19) is £11,700, however, different amounts apply to assets held in Trusts.
Capital Loss Relief
Principle Private Residents relief (PPR relief), if selling a property
Letting relief (if selling property)
When it comes to the calculation of CGT itself, there can be a number of complicated adjustments and/or 'sub-calculations' to include:
Adjustments to costs
Costs incidental to acquisition (qualifying costs only)
Costs incidental to disposal (qualifying costs only)
Enhancement expenditure for property improvements
Indexation of gains to account for inflation (applicable to certain assets acquired a long time ago)
Pooling of asset costs (known as 'Section 104 pooling' - relevant to share disposals when the same security (or securities) are purchased in quick succession).
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