If you own assets such as property, shares or a business, you may be liable to pay capital gains tax (CGT) when you sell, or even if you give the asset away.
The tax you pay will be based on the gain or increase in value your assets have made since you acquired them. If you purchased the asset the gain is calculated using the original purchase price, whereas if you were given the asset the gain will be calculated using its market value at the time of the gift.
Some assets are exempt from Capital Gains Tax, the main ones being:
- Your principle private residence
- Private Cars
- Personal possessions up to £6,000
- Savings investments held in ISAs TESSAs, OEPs National Savings, Government Stock and most Corporate Bonds
- Shares are taxable but those in the Enterprise Investment Scheme or venture capital trusts are exempt.
- Also exempt are life insurance policies and pension plans, unless these have been purchased second hand.
Everyone has a Capital Gains Tax personal allowance of (currently May 04) £8,200 per year. This means that you can make a gain on the sale of an asset of up to this amount each year. If the asset is shared with your spouse then both your allowances together will give you an annual exemption of £16,400.
Transfer of assets between husband and wife is tax free so it is often possible to transfer assets between spouses prior to a disposal to maximise your tax allowances. This must be done whiles husband and wife live together, or within one year of separation.
Where an asst has been transferred to a spouse, any gain on disposal will be calculated as if the spouse had owned the asset from the date of acquisition. If, for example, the wife pays tax at a lower rate than the husband, which is often the case, transferring assets in this way can give you a double whammy tax saving – once by getting the wife’s full personal allowance (£8,200) and once again on her lower rate of tax.
Capital gains are considered part of your income and are taxed at your marginal rate of tax when the gain has been added to your other income, currently 10 per cent, 20 per cent or 40 per cent.
If on disposal you make a loss on an asset, this loss can be off-set against other gains in the same tax year, or the loss can be carried forward to subsequent tax years indefinitely.
To Calculate the gain you have made:
Take the disposal value – Sale Price (market value if you are gifting the asset)
- Sales costs – solicitors and agents fees etc
- Purchase Price (or market value if the asset was gifted to you – if you acquired the asset before 31 March 1982 you take the market value at that date)
- Purchase costs – solicitors
- Expenditure on the asset whilst you have owned it – capital improvements which you have not been able to claim against any revenue from the asset, as an expense.