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You might already have heard about Capital Gains tax and wondered what it is and whether you need to be completing a tax return.
So what is Capital Gains tax or CGT as it is often called? To put it simply - you may be liable to CGT on things you own that you sell, give away or transfer wherever in the world these are located. CGT is a tax on profits or gains you make on the disposal of your assets.
There is a lot involved in Capital Gains tax and so the information we include in this section can only be an introduction. However, we have covered the main issues and these might help you decide if you need to contact the Revenue or not for more help. This is likely to be the case if you have shares in public (plc) companies such as Glaxo or Tesco etc. which you have bought over a number of years as there are special rules for working out the cost involved depending on when they were bought.
The rules for capital gains have changed substantially for disposals after 6 April 2008 (2008/09 onwards). A number of reliefs have been removed and there is a change to the rate of tax you have to pay. There are a few very limited circumstances where the old rules will apply for a little longer but we will not cover that here and will concentrate on how the changes will affect you from now on.
If you want to see how to work out the tax on your 2007/08 capital gains using the old rules you can still access the webpage with information for that year by using the link.
This section looks at:
Who is liable to pay CGT?
Which assets are free from CGT?
What are the rules for assets bought and sold for less than £6,000 - chattels
What reliefs and exemptions am I entitled to?
What if I make a loss?
How do I work out the gain?
What if I want to sell my own home?
How do I work out the tax I will pay?
Who is liable to pay CGT?
- You may be liable to CGT on assets you sell, give away or transfer wherever in the world these are located.
- Assets are things you own such as your house, shares or other possessions.
- If you own an asset jointly, your gain will be based on what share of the proceeds you received. For example if husband and wife or civil partners equally own an asset, each will have a gain on the sale based on half the proceeds.
- If you are someone who is not permanently settled in the UK you may be not domiciled here and the CGT rules are different for you. You should contact the Revenue for advice.
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Which assets are free from CGT?
- Some of the more common exempt assets are:
- The sale of your main home is usually free of CGT but see What if I want sell my main home? This tax-free status does not apply to other property such as second homes or let property.
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What are the rules for assets bought and sold for less than £6,000 - chattels
- Any gain is exempt from Capital Gains tax if the asset is bought and sold for less than £6,000.
- If there are joint owners, such as husband and wife or civil partners, each has a separate £6,000 limit to use in connection with their share of the asset in question.
- If the sale proceeds are more than £6,000, the gain cannot be more than:
(Proceeds of sale x 5/3) less £6,000
So for example if you sold a chest of drawers for £7,200 in October 2008 having bought the chest for £4,570 in July 2008 - the gain is £7,200 - 4,570 = £2,630 but it is restricted to (5/3 x (7,200-6,000)) = £2,000
- If the asset is sold at a loss for less than £6,000, you have to treat the sales proceeds as being £6,000 for working out any allowable capital loss.
For example if you have a painting that cost £11,000 and you sell it for £4,000, it would be treated as being sold for £6,000 giving an allowable loss of £5,000 and not £7,000 as might be expected.
- If the assets comprise a set or collection they are treated as separate assets unless they are sold to the same person or someone who is connected with or related to that person in which case the sales are added together for the purposes of the £6,000 exemption.
A set or collection is where the assets are essentially similar or complimentary and their value taken together is higher than if they were look at individually.
If you sell a set to someone you are connected with over more than one tax year the gain is worked out just as for a set or collection but is then a proportion of the gain is allocated to the year of each sale.
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What reliefs and exemptions am I entitled to?
- In very simple terms, your capital gain is the difference between the price you originally paid for the asset (or if it was given to you - what it was worth on that day) and the amount you get when you sell it. However there are a number of special rules to bear in mind and these are listed below.
- The first £9,600 of your gains for 2008/09 (£9,200 for 2007/08) is free from tax - this is called your annual exemption.
- A husband and wife (or civil partners)each receive an annual exemption.
- You may not need to tell the Revenue about any capital gains if they are less than the annual exemption of £9,600 and the proceeds after costs are less than £38,400 for 2008/09. This last figure is always four times the annual exemption and changes from year to year.
- You can see an example of this in Joan
- If your gains are more than £9,600, you will need to complete a tax return to show the capital gain you have made. If you do not normally complete a return you will only be expected to do so for the year of sale. Please contact the Revenue if you are unsure what to do.
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Joan - sale of shares - proceeds less than £38,400 and also gain over £9,600
Joan owned some ICI shares which she sold for £15,000 during 2008/09. Her gain on the shares before any other deductions was £6,000. As the proceeds are less than £38,400 and the gain is less than the annual exemption of £9,600, Joan will not need to complete a tax return to include the gain she made.
However, if the proceeds were still £15,000 but Joan made a gain of £10,000, she would have to complete a tax return as the gain is more than £9,600 - her annual exemption.
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- If you give an asset to your husband or wife whilst you are legally married and living together - you will not pay any CGT at that time. The same rules apply to a civil partnership.
- If and when your husband or wife (or civil partner) disposes of the asset, he or she will work out their gain by looking at what it cost you and not the value at the date you gave it to them.
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Ann - gift of asset to husband - later sale
Ann bought a cottage in 1996 for £14,000. In August 2001 when the cottage was worth £60,000 she gave it to her husband James. In June 2008 James sold the cottage for £300,000. James's gain on the property before any other deductions will be £300,000 less the original cost of £14,000, i.e. £286,000 and not £240,000 (£300,000-£60,000)
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What if I make a loss?
- You first set any loss against any gains in the same year even if the gains are covered by your annual exemption.
- When you take your gains from your losses for the year, if you still have losses remaining you should let the Revenue know so that you can use the loss in a later year.
- A loss made on an asset that is free of CGT cannot be claimed.
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Eileen - loss on sale of shares
Eileen bought some shares in August 2001 for £22,000. In August 2008 she sold them for £5,000. Eileen has made a loss of £17,000, which she could use against any gains she makes in the same tax year 2008/09or she can carry the loss forward against any gains she makes in future years.
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How do I work out the gain?
- If you give away an asset the Revenue will treat you as having sold it for what it is worth.
- If you are selling an asset you owned at 31 March 1982, you use the market value (the amount you could have sold it for on the open market) instead of your original cost
- When you improve or add to your asset, you can deduct this cost from the sale proceeds, but you can only include improvements - e.g. an extension to a house and not repairs.
- You can deduct the costs of buying and selling from the gain. Typical costs will include legal expenses and estate agents' fees for property, and broker's commission on the purchase and sale of shares.
- Your gain will normally be worked out like this:
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Proceeds or market value
Less: Original cost or for gifts - the market value at the date of the gift. Use the 31 March 1982 value if the asset was acquired before this date
Less: Any additions to the asset
Less: Any costs of purchase
Less: Any costs incurred in adding to the asset
Less: Any costs of sale
This then gives you the gain before indexation
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Neil 1 - sale of house - working out gain
Neil bought a house in March 1978 for £10,000. Neil already had another home of his own. By March 1982 the value had increased to £25,000.
In July 2008 Neil sold the house for £200,000. He had legal costs of £1000 on the purchase of the house and £2,500 legal and estate agents costs on the sale. Neil had improved the house by building an extension costing £15,000 in May 1999.
Neil's gain is: |
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March 1982 value |
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Cost of extension |
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Legal expenses on purchase |
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Legal expenses on sale |
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Gain before indexation |
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What if I want to sell my own home?
- There is no CGT on the sale of your own home provided you have lived there throughout the time you owned it. This also applies if your home is a fixed caravan or houseboat.
- If you rented out a room in your house, there will be no capital gain if the lodger shares your living rooms and eats with you even though they also have a room of their own.
- Otherwise, there are special rules if you lived elsewhere or you let your home for part of the time before you sold it. Please contact HMRC for more information.
- If you have more than one house, you have up to 2 years from purchase of the second home to decide which one you want to be your main residence for CGT purposes. You will need to let HMRC know what you decide within those two years, otherwise they will decide which one is your main residence based on the facts.
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Tax Tip
If you want to sell part of your garden you should make sure that this is sold before the house and the remaining garden.
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How do I work out the tax I will pay?
For disposals of non-business assets after 5 April 2008 - the rate of tax due on the chargeable gain you work out will be a straight 18%.
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Neil 2 - working out the CGT payable
From example Neil 1 we can see that Neil has a gain of £156,500 for 2008/09. From this we take off Neil's annual exemption of £9,600 leaving £146,900 taxable.
Capital gains tax due @18% comes to £26,442.
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