What Is Capital Gains Tax and How Do I Plan for It?
Capital Gains Tax (or CGT) is quite a simple tax to get your head around. However, like all taxes, once you get into the details, it can become quite complicated.
It is therefore important to know exactly what’s involved to ensure you don’t end up paying too much or too little, so here is a guide to get you started.
What Is Capital Gains Tax?
Capital gains tax is typically paid when you sell something of value (worth £6,000 or over) and make a profit from it. The tax is worked out by applying a percentage to the amount of profit that you make from the sale, but the exact amount depends on a range of factors that we will look into shortly.
CGT is often associated with selling a property, and this is the most common situation where most people will end up paying it. However, you do not pay CGT when you sell your main home, and it only applies if you are selling a second property. But if you invest in properties to let, you will have to pay the tax when you sell any of the properties.
Property, Shares, Jewellery and More
While selling a property is one of the main occasions when you will need to pay CGT, you will usually pay the tax on other valuable items that you sell and make a profit on. These often include things like jewellery, antiques, gold and collectable items.
So if you are interested in any of these things, keep in mind that tax might be due when you sell them.
Another thing that you often have to pay capital gains tax on is shares. If you have shares and you sell them for a profit, tax is usually due.
But you will not always have to pay tax on all of your personal possessions, and you certainly don’t want to pay tax when you don’t have to. For example, you don’t pay CGT on ISAs because these are tax-free, so it’s important to find out from a professional when you do and don’t have to pay capital gains tax.
Working Out How Much to Pay
If you have something that you will have to pay tax on, you need to work out how much it will cost you. This can be quite complex, and this is another reason why a chartered accountant can be useful.
The first thing to take into account is the profit you make. For example, let’s say that you sell an item of jewellery for £15,000 that you bought for £12,000, making you a profit of £3,000.
While capital gains tax does apply, that does not mean you automatically pay tax on the full £3,000 profit. For a start, everyone has an allowance, which is currently £11,300 per year. So if your gains are lower than this, you don’t pay tax.
If you sold five items of jewellery and ended up making £15,000 in profit, then you might need to pay tax – but not necessarily. You might also be able to make other deductions to reduce the amount you have to pay. The deductions depend on what you are selling (for a property, these include legal fees and stamp duty).
Once you have taken off what you are allowed to, you will be left with a figure. This is the final profit, and this is what you pay tax on.
There are also ways to reduce the amount that you pay in tax. For example, you can often transfer assets into the names of both you and your spouse because you both get an allowance each year, and this could be a legal way to reduce your tax bill.
If you do have to pay capital gains tax, there are different rates to keep in mind. Firstly, the rates for property are different from other types of valuable items that you sell. Secondly, you will pay a different amount depending on whether you are a basic rate taxpayer or a higher rate taxpayer.
When you sell a property, for example, basic rate taxpayers pay 18% while higher rate taxpayers will pay 28%.
For everything else, basic rate taxpayers pay 10% while higher rate taxpayers will pay 20%.
Always Seek Professional Help
As you can see, the basic idea of capital gains tax is quite simple. However, it can get complicated when you need to work out exactly how much you should pay.
Taking off your allowances and working out how much profit you have made can be complicated. If you pay too little, you could end up getting in trouble – and you don’t want to pay too much.
If you’re still asking what is capital gains tax, or you are confused about how much you should be paying, our accountants at Keith Graham can help you. We provide specialist advice and guidance so you can work out exactly how much you need to pay, and often you will end up paying less tax as a result.
There are many potential ways to save, which could more than make up for the cost of professional help from an accountant. So get in touch if you need some advice on capital gains tax, and we will be happy to assist you.