Capital Gains Tax
What is Capital Gains Tax?
If I asked 100 people “What is Capital Gains Tax?” I suspect that about 60% would get the concept right and only a really small number would completely “get it”. Except other accountants that is!
So Capital Gains tax is in principle a very simple idea – like many taxes – it is the tax that you pay when you dispose of an asset and make a profit. In the UK, every individual is entitled to a particular amount of Capital Gains free from tax each year. Even if you don’t make a profit you can possibly get some tax relief going forward.
What do you mean by dispose of?
And now it starts to get difficult. So let me give you a few examples to explain what dispose of means for Capital Gains Tax. For most situations dispose of means sell: you sell a property; sell works of art; sell shares. But dispose of goes much wider than that and includes when you “give away” stuff or “give it away at a reduced price”
When you give stuff away at a reduced price, very often for Capital Gains Tax purposes, the tax rules treat it as if you sold it for the market value. So that’s one possible tax dodge stripped away.
This is complicated stuff so even if you are going to attempt this on your own, at least get some advice first – BEFORE you do the deal.
What is an asset?
So an asset can be just about anything though mostly its houses and shares – that’s the most common stuff I see as an accountant. But more basically if something has a value and you sell it for higher value, then it might be a gain (or profit) that is taxable.
Lots of people buy and sell properties. Buy a wreck. Spend some cash. Sell it. Start again. And very often people think of that as being taxed under these rules. But if you do that often enough so that it becomes a trade, then you might find yourself paying Income Tax instead, so watch out.
Why Capital Gains Tax is more attractive than Income Tax?
There are three main reasons I think for this:
- At the moment there is still an annual exempt amount for Gains. Its been around £11 – 12k for the last few years
- The rates of tax at the date of writing are between 10% and 28% and in general lower than Income Tax.
- There is more flexibility with Capital Gains Tax than with Income Tax
Anything Else?
There are a couple of ways to reduce your tax bill and a strategy that can be useful when doing some tax planning and that can have the effect of either removing ANY tax bill or reducing it to almost zero:
Business Asset Disposal Relief (used to be called Entrepreneur’s relief)
Business Gift Relief
Inter spouse transfers
Well I hope that has whetted your appetite….. and look if you have any questions please just ask and I’ll even write a special blog post for you!