Capital Gains Tax
In the UK when we profit from selling something, or even from giving something away, there is a tax attached to that profit; this tax is called ‘Capital Gains Tax’ and every time we dispose of things like shares or property there is a chance that we may need to pay it. When we get rid of an asset and make a profit, whether we sell it, gift it, put it into someone else’s name, swap it for something else or receive a payout in lieu of something that has been stolen or destroyed, the profit that we make may be subject to Capital Gains Tax.
However, the assets subject to CGT do not include our personal car or the home where we live or any personal possessions up to £6,000. As well as these exceptions, there is also an amount set each year, up to which we are allowed to profit before Capital Gains Tax kicks in; this amount is known as the ‘Annual Exempt Amount’ (for 2010-11 it was £10,100 per person).
Capital Gains Tax is currently charged at 18% on all gains made. It is important to remember that disposing of assets and making gains can happen at all sorts of points in one’s life when there was perhaps no intention of making a profit, for instance, if you separate or divorce and belongings are moved between you and a financial gain is made Capital Gains tax will be payable on amounts over the ‘Annual Exempt Amount’.
Capital Gains Tax was introduced to prevent those of us who would otherwise escape paying tax on taxable income, by converting it in to tax-free gains; the Capital Gains Tax means that this income is also included in our taxable income. This tax tends to hit those of us selling second homes or stocks and shares hardest, as it was designed to harvest revenue from the profit made on such activities.
Increasing Capital Gains Tax is often a popular choice when governments are looking to raise revenue, perhaps because it was traditionally seen as the tax that affected mainly the well-off, who could better afford the extra burden, however, nowadays it tends to be pensioners selling second homes to fund their retirements or ordinary people who have invested in shares as a way of saving that are affected the most.
In our current economic climate, it looks probable that our government will need to take drastic measures to raise money and the possibility of Capital Gains Tax increases is looking more certain; on top of any increase there is also the option of lowering the ‘Annual Exempt Amount’ and setting it at a level that spreads the net wider catching more tax payers in it.
There are however, ways to reduce, escape or defer Capital Gains Tax in some cases, so it is worth sitting down with your accountant to explore the options available to you, a professional tax advisor will be able to explain what if anything you can do to lessen the amount of tax you might have to pay.
