When it comes to capital gains, there are a few basics that everyone should know. Whether you are a solo trader or in a partnership, understanding how capital gains are taxed can help you make the most of your money.
What Are Capital Gains
The Capital Gains Tax (CGT) is a tax on the profit you make when you sell or ‘dispose of’, an asset. When you dispose of an asset, you may make a capital gain or a loss.
A capital gain is a difference between what you paid for the asset (its ‘cost base’) and what you received when you disposed of it. A capital loss is the opposite—it’s the difference between the asset’s cost base and what you paid to dispose of it.
If you make a capital gain, you may have to pay CGT. But if you make a capital loss, you can use it to reduce any capital gains you made in the same financial year. Y
When Do You Pay Capital Gains
You’ll usually have to pay capital gains tax if you make a profit (‘gain’) when you sell chargeable assets, such as shares, property or businesses. Some other types of assets that may be subject to CGT, such as:
- Personal possessions worth more than £6,000 such as jewellery, art or antiques (excluding your car)
- Betting, lottery or pools winnings
- Compensation payments
- Gains from selling certain types of leased property
- Shares that are not part of a ‘tax-privileged’ scheme, like in an Individual Savings Account (ISA)or pension
- Second homes
- Buy-to-let properties
The tax-free allowance for capital gains (the ‘annual exempt amount’) is £12,300 for the 2020/21 tax year. This means you will only pay CGT on gains above £12,300.
How Is Capital Gains Tax Calculated
The rate of capital gains tax you pay depends on your overall income tax rate and whether the asset is classed as a ‘chargeable asset’.
The amount of capital gains tax you have to pay is calculated using the following formula:
The amount of tax you have to pay = The total amount of your capital gains – The amount of your capital losses
For example, let’s say you have a capital gain of $1,000 and a capital loss of $500. The amount of tax you would have to pay would be $1,000 – $500 = $500.
The amount of tax you have to pay is also affected by your tax bracket. Capital gains are taxed at a lower rate than ordinary income, but the exact rate depends on your tax bracket.
- If you are in the 10% or 15% tax bracket, you will pay 0% on long-term capital gains.
- If you are in the 25%, 28%, 33%, or 35% tax bracket, you will pay 15% on long-term capital gains.
- If you are in the 39.6% tax bracket, you will pay 20% on long-term capital gains.
Short-term capital gains are taxed at your ordinary income tax rate.
The amount of tax you have to pay on capital gains can also be affected by other factors, such as whether you are married or whether you have any other income.
What Are the Exemptions from Capital Gains Tax
When it comes to capital gains tax, there are a few key exemptions that you should be aware of.
Private Residence Relief
Private residence relief means that if you sell your main home, you will not have to pay any capital gains tax on the profits.
Business Assets
Business assets include things like machinery and equipment used in your business, as well as business premises.
Gifts
Gifts mean that if you give away an asset to someone else, such as a family member, you will not have to pay any capital gains tax on the profits.
Conclusion
It is important to remember the basics of capital gains when it comes to investing. By understanding the basics of capital gains, you can minimise your tax liability and maximise your profits.
When it comes to selling an asset, it is crucial to seek professional advice to ensure you minimize your capital gains tax bill. At Accountants247, we offer a range of accounting services in Warrington that can help you achieve this. Our team of experienced accountants will work with you to calculate your capital gains tax liability and advise on the best way to deal with this. We can also help with the preparation of any necessary paperwork and the lodgement of your tax return. Let us help you get the most out of your sale and minimise your tax bill today. Schedule an appointment with us today!
