Capital Gains Tax Explained

Capital Gains Tax is a tax that is payable on profits made above the set threshold on the sale of some assets. It is important to recognise whether you have a Capital Gains tax liability on any sale that you make in order to ensure that you are compliant with the law.

The following guide offers information on what Capital Gains Tax is, when it is payable, instances in which there is no need to pay the tax, and the allowance that is offered annually.

What is Capital Gains Tax?

Put simply, Capital Gains Tax refers to the taxation that must be paid on any profits accrued on any investments that you have. The tax liability is only in place once the threshold is met and this is referred to as the Annual Capital Gains Allowance.

To further explain, Capital Gains Tax is the tax that is due on the profits made from the sale (or when you ‘dispose of') an asset that has increased in value.

Disposing of an Asset

Capital Gains Tax becomes payable on profits made above the annual threshold following the disposal of assets. Disposing of an asset occurs when:

• An asset is sold
• An asset is given away or gifted
• An asset is swapped for something else
• Compensation is paid on the asset, for example, if insurance pays out for a lost or stolen asset.

Disposing of an asset may lead to a gain (or profit) which is liable for Capital Gains Tax. Capital Gains Tax becomes payable when you sell:

• The majority of personal possessions that exceed a value of £6,000 (excluding your car)
• Property that is not your main home
• Your home if you have let it, used it for business or if it is very large
• Non ISA or PEP shares
• Business assets

The above assets are referred to as ‘chargeable assets'.

What is the Annual Capital Gains Allowance?

Every year, the majority of those who are liable for Capital Gains Tax are given an annual tax-free allowance which is officially referred to as the ‘Annual Exempt Amount'. There is only a Capital Gains Tax liability if your overall gains for the tax year, once any losses and applied reliefs are deducted, exceed the Annual Exempt Amount.

There is one Annual Exempt Amount that is in place for the following:

• The majority of individuals who live in the UK
• The executors or personal representatives of the estate of a deceased person.
• Trustees for disabled people

The majority of other trustees receive a lower Annual Exempt Amount.

For the year 2016-2017, individuals, personal representatives and trustees for disabled people have an Annual Exempt Amount of £11,100.

Capital Gains Tax Rates for 2016-2017.

As per the UK Government website, the current rates for Capital Gains Tax for 2016-2017 are as follows. It is important to be aware that these rates can change annually, and so the website should be checked for confirmation on current rates.

The following rates for Capital Gains Tax currently apply. To confirm the tax rate that you use, you will need to work out your taxable income first.

• 10% and 20% tax rates for individuals (excluding residential property and carried interest)
• 18% and 28% tax rates for individuals for residential property and carried interest
• 20% for trustees or for personal representatives of someone who has died (excluding residential property)
• 28% for trustees or for personal representatives of someone who has died for disposals of residential property
• 10% for gains qualifying for Entrepreneurs' Relief
• 28% for Capital Gains Tax on property where the Annual Tax on Enveloped Dwellings is paid - the Annual Exempt Amount is not applicable
• 20% for companies (non-resident Capital Gains Tax on the disposal of a UK residential property)

Capital Gains Tax for Gifts to Spouses and Charity

There are special rules in place for Capital Gains Tax on gifts made to your spouse or a charity, which are as follows:

Spouse or Civil Partner

Capital Gains Tax is not payable on gifts to your spouse or civil partner unless:

• You separated and did not live together in the tax year of the gift
• The gift was of goods for their business for them to sell on

If the spouse or civil partner goes on to sell the gifted asset, Capital Gains Tax may become payable by them.

Charity

Capital Gains Tax is not payable on assets that are given to charity unless you sell an asset to charity for more than you paid for it and for less than the market value of the gift.

Non-Domiciled People in the UK

Non-domiciled people are those who have their permanent home outside of the UK, for example, those who were born in a different country and reside in the UK but maintain the intention to return to their birth-country. Their domicile status will impact upon their tax requirements, and so it is important for each person to recognise individual obligations.

People who are non-domiciled in the UK do not receive the Annual Exempt Amount if they have claimed the ‘remittance basis' of taxation on their foreign income and gains. Some non-domiciled people choose to claim the ‘remittance basis' if they have income and gains from abroad, and they have deemed it more beneficial to be taxed on the foreign income and gains that they bring into the UK, instead of on all income and gains that occur. This is a complex area of taxation and as such, expert advice should be sought from a specialised solicitor or financial adviser.