A capital gain in any given tax year can give you a much bigger amount of tax to pay than usual and if that comes as brand-new information to you, it will be a nasty surprise. So here is a basic run-down of capital gains tax and when you should be expecting it:
- Capital Gains Tax (CGT) – the tax on the profit you make when you dispose of a privately-owned asset.
- Profit – is usually the difference between what you paid for your asset, and what you sold it for.
- Disposal – could be selling it, giving it away, swapping it for something else, or being compensated for it (like insurance pay-outs).
- Asset – most personal possessions (excluding your car), shares, property (unless it’s always been your own home).
- Gifts – In the event that you give your asset to someone, or sell it to them for less than it is worth, your gain will instead be based on the market value as at the date of disposal.
If you have disposed of an asset, your capital gain will be:
Sale price on disposal
Less:
Expenses related to disposing of the asset
What you paid on acquisition
Value-added during ownership (any improvements you have made to the asset)
Expenses related to acquiring the asset
= Capital gain
For example, if you sold a rental property in the year (assuming you never lived there yourself), your capital gain may look a little something like this:
| Sale price | £250,000 |
| Expenses related to disposing of the asset (solicitors/ estate agents) | (£2,500) |
| What you paid on acquisition | (£150,000) |
| Value added during ownership (e.g. the extension you put on) | (£20,000) |
| Expenses related to acquiring the asset (surveys/estate agents) | (£1,500) |
| Chargeable gain | £76,000 |
How much tax you pay on your chargeable gain will depend on your other income in that tax year. Any capital gains which fall into the basic rate band will be taxed at 10% (18% for residential property). Any that fall in the higher rate tax band will be taxed at 20% (28% for residential property). Using the above gain as an example, if your other income totalled £42k in the 18/19 year, you would pay £20,845 in CGT.
This tax is separate from, and in addition to your regular income tax, but will be collected at the same time as your income tax (although, this is due to change in April 2020). You can see how this would put a spanner in the works if you didn’t see it coming!
If you’re thinking about disposing of an asset, or you think you already have, get in touch for more specific advice and/or calculations.
