Understanding Capital Gains Tax (CGT)
Capital Gains Tax or CGT is a tax on the profit you make when you sell or dispose of an asset that has increased in value. The gain in value is liable to Capital Gains Tax, after your personal allowance has been deducted.
Make the most of your CGT allowances
CGT allowances can be used by anyone investing in shares in the stock market or in Unit Trusts. Each year the allowance can be used to soak up some of the gains or profits without having to pay Capital Gains Tax.
The catch is that, if the allowance is not used in one year it cannot be rolled up into future years. The saying goes “If you do not use it you will lose it”.
Pensions and ISAs are exempt from this tax so the gains within these investments are CGT free which is a valuable allowance and should be used as the first place to invest savings.
By investing in CGT exempt funds such as stocks and shares ISAs and personal pensions to the full allowance each year will also allow the investor to use the CGT allowance elsewhere.
You buy shares for £5,000 and sell them later for £25,000. You have made a gain of £20,000.
There is a personal capital gains tax allowance which allows you to make a profit within each tax year up to a limit with no tax to pay. For the 2018 – 2019 tax year the allowance is £11,700. Therefore, the first £11,700 of profit will not be taxed.
The shares made a gain or profit of £20,000. Take away £11,700 and the taxable gain will be £8,300. This will then be taxed at either 10%, 20 %, 18% or 28%, depending on the type of asset and the income tax rate of the individual who owned the asset.
The 18% and 28% tax applies to property gains made through selling property that is not your main residence, (18% for basic rate taxpayers and 28% for higher rate taxpayers).
If you are a basic rate taxer when the shares are sold and the gain when added to your other taxable income is still within the basic rate tax band, the tax will be as follows.
This is an £8,300 gain x 10% tax = £830
For a higher rate taxpayer the gain would be taxed as £8,300 gain taxed @ 20% = £1,660
Questions about the amount of CGT you may have to pay
If you are in any doubt about the CGT liability you may have on an asset you are intending to sell then you should seek advice from an Independent Financial Adviser or Chartered Accountant before the sale is made. It will be too late to avoid the tax due if the sale is made and then you seek advice as you can not reinstate the assets to reduce the tax liability.
There are other complexities about capital gains tax, and different assets are taxed at different rates and have different allowances which this section does not cover. This is where a Chartered Accountant is the best person qualified to guide you as we are not specialist tax advisers.