Capital Gains Tax
'Capital gain' is the term used in accounting to describe any profits earned from the sale or disposal of any asset or assets.
Capital Gains Tax is therefore the tax, or contribution of money, levied by the government from any capital gains, including profits from the sale of land, valuable possessions or investments such as stocks and shares.
If your business is carried out through a limited company or organisation, you will not be required to pay Capital Gains Tax because you already pay Corporation Tax. Capital Gains Tax is simply included in the Company Tax Return under 'chargeable gains'.
What is an asset?
For something to be described as an asset, it must meet two simple specifications:
1. It must be owned in whole by you or your company - ownership being by definition the right to possess, use, enjoy and dispose of your property without permission.
2. It must retain some kind of financial value that a potential buyer would be willing to pay for ownership of said property.
Types of asset
There are two main types of asset. These are:
Tangible assets have a physical presence and can include:
- your business premises
- any company vehicles - whether company cars, vans, lorries, tractors etc.
- machinery and equipment used in the running of your business
- any IT equipment such as computers, printers, scanners, photocopiers etc.
- any payments owed to you by another
- the value of any confirmed orders.
In the case of many tangible assets, the value tends to decreases over time. This is because tangible assets, such as equipment or machinery, are used on a daily basis and so therefore undergo general wear and tear.
Intangible assets can be more difficult to identify because, although the add value to your business, they do not have a physical presence.
Intangible assets can be divided into three main categories:
- Intellectual property - Intellectual property includes any legal ownership over brand names, media representations or inventions. This could include trade names, trade marks, copyright or design- all of which are legally recognised possessions.
- Intellectual assets - Intellectual assets describe the skills, knowledge and experience of a company's employees that can be used to benefit the business.
- Intellectual capital - Intellectual capital describes the accumulated knowledge and skills of a business. This can include the intellectual assets (employee knowledge and experience), plus customer, distributor and supplier skills and knowledge.
Why pay Capital Gains Tax?
An asset is subject to Capital Gains Tax in the following situations:
- when it is sold
- when it is given away as a gift
- when it is exchanged for something else
- when compensation is received for its damage.
You are never taxed on the whole value of the asset- only the gain you make. For example:
You buy a house in August 1990 for £80,000. In January 2011, you sell the house for £200,000. You have made a gain of £120,000. You will therefore only be taxed on the gain of £120,000, and not on the original £80,000 you invested in 1990.
Assets liable for Capital Gains Tax
Profit made from the sale of property - like houses, land or leases, is usually liable to Capital Gains tax.
Types of property usually liable to Capital Gains Tax include:
- any second homes
- any property that you've rented out
- business premises, such as a farm or shop
- land, such as that used for agricultural or development purposes.
Valuable personal possessions such as jewelry or antiques
Personal possessions are usually liable to Capital Gains Tax if they are worth over £6,000. This can apply to individual products or sets (especially antiques). This could include:
- collectors items - e.g. stamps/postcards
- artwork - paintings, sculptures etc.
- antiques - jewelry or furniture.
Intangible business assets
If a business is sold, it will be taxed on any extra value accrued over the years from intangible assets such as:
- registered trademark
- lease value
- web page
- marketing materials
- customer lists
- telephone number
These assets, combined, make up what is known in business terms as 'goodwill'. Goodwill takes a long time and effort to build and is seen as a valuable business asset. Often a company will be sold to new owners on the grounds of the value of its goodwill.
Any profits made from investments are liable to Capital Gains Tax. This could include:
- stocks and shares - unless they are held in a tax-free investment savings account such as an ISA or PEP
- units in a unit trust
- bonds (except for premium bonds) - these are investments in companies or the government.
If you are a UK resident (if you usually live here), then you may be liable to Capital Gains Tax on any foreign property. This could include:
- shares in a foreign company
- a holiday home abroad
- land purchased overseas for the purpose of development.
Capital Gains Tax rates
Each year, individuals who are liable to pay Capital Gains Tax get an annual tax-free allowance (known as the Annual Exempt Amount). This means they will only pay Capital Gains Tax if overall gains for the tax year exceed the Annual Exempt Amount.
Any amount exceeding the Annual Exempt Amount is taxable income and Capital Gains Tax rates will apply.
To view Annual Exempt Amounts and Rates for Capital Gains Tax, please see: HM Revenue and Customs - Capital Gains Tax rates and annual tax-free allowances.
Capital Gains Tax FAQ
What information will I need to work out how much Capital Gains Tax I owe?
In order to work out how much you have gained or lost from the sale or disposal of an asset, you will need to prepare the following information:
- A description of the asset - e.g. details of a property, such as size and location, or the age of an antique etc.
- A record of the sale or disposal date.
- The proceeds from the sale or disposal of the asset- the amount you received for the asset, or the market value of the asset if it was given away.
- The purchase or acquisition date.
- The purchase or acquisition costs - in other words, either the amount you originally paid for the asset, or the worth of the asset on acquisition (if you inherited it, or were given it as a gift etc.).
- Details of any other costs - often there are other costs involved with buying and selling an asset, such as stockbroker's fees or money spent on asset improvements (renovations, extensions on a property etc.).
- Details on any relief you're claiming-this could include Private Residence Relief if you're selling your home, or Entrepreneurs' Relief if you're selling you business.
How do I pay Capital Gains Tax?
Any capital gains or losses made during the tax year needs to be reported with your Self Assessment Tax Return, and sent to HMRC.
If you haven't received a tax return and know you owe tax on your gains, then you must contact HMRC. Sometimes you may need to send for additional Capital Gains Tax pages for your tax return.
If you don't usually have to complete a tax return, then you will need to register for Self Assessment before the 5 October. You can register for Self Assessment on the HMRC website.
Do I have to pay Capital Gains Tax if I gain assets from a divorce?
The Capital Gains Tax rules for divorce and separation can be quite complicated. Often during divorce or separation, assets will be divided between the two parties. In some situations, this exchange of assets will be exempt from Capital Gains Tax, and in others it won't. It depends on a number of factors, predominantly on when the exchange took place. If it was:
- During the tax year of separation - Then you won't have to pay tax on gains if you've lived together for part of that tax year, or alternatively, if the asset wasn't originally bought for resale. If you lived separately during the tax year, or passed on (for example) a partly restored property meant for resale, then you will need to pay Capital Gains Tax.
- During the tax year after separation - If you exchange or transfer assets at any point after the tax year of separation, then different rules apply. You will have to work out the value of your gain if all three of the following apply to you:
1. you transfer any asset other than your home (main residence)
2. you've been permanently separated for all of the tax year
3. you're not divorced yet.
Are there any tax-free Capital Gains?
There are some assets exempt from Capital Gains Tax. These include:
Gifts - Gifts between husband and wife or civil partners is not taxable unless it makes profit in the future, in which case the gain may be taxed at a later date. Gifts to charities are also exempt from Capital Gains Tax.
Home - Whereas you are expected to pay tax on any gains made from the sale of a second home or property you don't inhabit, the sale of your home is tax-free.
Private cars - If you are selling a car you have only owned for personal use, you will not be required to pay Capital Gains Tax.
'Low value' products - Any personal possessions worth less than £6000 is exempt from Capital Gains Tax. This includes products that are in a set, e.g. a dinner service will be taxed as a whole rather than on each individual piece.
Wasting assets - A wasting asset is anything valuable that has a useful life of 50 years or less, like a caravan or a boat.
Winnings - Including winnings from bets, pools or the lottery.
National savings & investments
Shares - When held in tax-free investment schemes.
Inheritance - When you inherit money after someone has died, you will not have to pay Capital Gains Tax at the time - only if you choose to sell it.
Other gains exempt from Capital Gains Tax include:
- proceeds from life insurance
- child trust funds.
How can an accountant help with Capital Gains Tax?
Although it is always possible to handle all of your tax obligations alone, there are many benefits of hiring an accountant to handle them for you.
There are a number of key deadlines across the tax year that, if missed, will result in you having to pay penalty fees plus interest. There are different deadlines for telling HMRC that you're liable for Capital Gains Tax, for filing your online tax return, for sending in your paper tax return and for paying the taxes you owe. The rate of interest you owe will increase the longer you leave it and can result in you having to pay 100% interest on all tax due.
Hiring an accountant is one way to avoid paying late penalties. An accountant will be able to register with HMRC and act on your behalf regarding all tax matters. HMRC refers to accountants as 'tax agents'.
As well as avoiding late fees, an accountant can lower your taxes by taking certain relief schemes into account, such as Private Residence Relief and Entrepreneur’s Relief.
To find out more about how an accountant can help you, and how to choose one, please visit our FAQ page.
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