Capital gains represent the profit earned from the sale of an asset, which could range from real estate to shares, cryptocurrencies, artworks, or vintage vehicles. This gain is essentially the difference between the purchase price of the asset and its selling price. Profits on such assets may be taxable under certain conditions.
Capital Gains Tax (CGT) Overview
The Capital Gains Tax (CGT) includes a tax-free allowance, also known as the Annual Exempt Amount, which is £12,300 for the 2020/21 and 2021/22 tax years, not £3,000 as mentioned. Profits exceeding this allowance are subject to CGT at the following rates:
- Shares: 10% for basic rate taxpayers, 20% for higher rate taxpayers
- Residential Property: 18% for basic rate taxpayers, 28% for higher rate taxpayers
- Cryptocurrency: 10% for basic rate taxpayers, 20% for higher rate taxpayers
- Other Assets: 10% for basic rate taxpayers, 20% for higher rate taxpayers
It's important to note that selling your primary residence usually qualifies for Private Residence Relief, making it exempt from CGT.
Example of Capital Gains Tax Calculation
Consider Sarah, who bought a buy-to-let property for £100,000 in 1990 and sold it for £300,000 on July 1st, 2023. The calculation of her CGT would be as follows:
- Capital Gain: £200,000 (Sale price £300,000 - Purchase price £100,000)
- Taxable Gain: After deducting the CGT allowance (£12,300 for accuracy), her taxable gain would be £187,700 (£200,000 - £12,300).
Sarah's CGT rate would depend on her total taxable income and gains for the year, determining whether she falls within the basic or higher tax bracket.
Handling Capital Losses
If an asset is sold for less than its purchase price, resulting in a capital loss, this loss can be used to offset other capital gains in the same tax year. If not fully utilized, losses can be carried forward to future tax years to offset against future gains.
Key Takeaways
Capital gains tax considerations are pivotal in financial planning, especially when selling valuable assets. Understanding the applicable rates, exemptions, and how to efficiently use losses can significantly affect your tax liability. Proper calculation and strategic planning can help in optimizing tax outcomes on capital gains.
