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Capital Gains Tax
What is Capital Gains Tax?
Capital Gains Tax (CGT) is the tax you pay on the profit or gain you make when you sell, give away or dispose of an asset.
Not all assets are subject to CGT. For example, you would not expect to pay Capital Gains Tax on the sale of your main residence, or private car; however profits from other assets such as: a second home, shares, securities, foreign currency, business assets, copy rights and certain personal possessions worth more than £6,000 (for example a painting) are all potentially liable to Capital Gains Tax .
The focus of this guide is Capital Gains Tax in relation to shares, securities, foreign exchange and funds (eg unit trusts or OEICs).
Rates & Allowances
Since the 2008 budget, Capital Gains Tax is now one of the UK’s more ‘generous’ taxes.
Investors are allowed to make up to £10,100 in Capital Gains this year (2009/2010) completely tax free. This is called the Annual Exempt Amount. Any gains above the Annual Exempt Amount are subject to a flat rate tax at just 18% - irrespective of which Income Tax bracket the investor falls within.
Compare this to the 40% tax rate applicable to income for Higher Rate Tax payers (soon to be 50% for some!), and you can see that Capital Gains Tax is considerably preferrable to the the Income Tax regime.
Calculating Your Gain
You need to work out the gain or loss separately for each asset you dispose of during the tax year.
To calculate your gain, simply deduct the purchase price of the shares from the sale price. You are also allowed to deduct certain allowable costs.
If you give the shares away or sell them at less than market value, then the sale price is deemed to be the market value.
If the shares were acquired before 31 March 1982, then the purchase price is deemed to be the market value as at 31 March 1982 rather than the actual purchase price.
The associated costs that you are allowed to deduct from your gains on shares and forex are very limited, but include:
- Broker fees or commission
- Fees for professional advice - generally valuation services only.
- Stamp Duty, and
The cost of software, periodicals, training courses, data feeds and accountancy fees for preparing your tax returns cannot be offset against gains, unless you have “Trader” tax status, in which case you will be subject to the Income Tax rules - more of that in the article Day Trader & Investor Status for Tax Purposes.
In August 2008 you bought 100 shares in ABC plc for £5,000. You paid £25 in Stamp Duty and £50 in Broker Fees. In March 2009 you sold the shares for £10,000, and paid £50 in Broker fees.
To work out your gain:
Sale Price = £10,000
Less Cost of Sale
Broker Fee = £50
Less Purchase Price = £5,000
Less Cost of Purchase
Broker Fee = £50
Stamp Duty = £25
Gain = £4,875
Calculating Tax Due
Once you have calcuated the gain or loss for each asset you disposed of, add all the gains all together and subtract the losses to work out your total overall gain (or loss).
If your total overall gain is higher than the Annual Exempt Amount (£9,600 for tax year 2008/2009), then you will pay Capital Gains Tax. If your total overall gain is less than the Annual Exempt Amount there is no tax to pay.
To work out your Taxable Gain, deduct the Annual Exempt Amount from your overall total gain for the year. Gains above the annual Exempt Amount are taxed at 18%.
For example, if you made £15,000 in gains and £5,000 in losses during the tax year 2008-09, your overall Capital Gain is calculated as follows:
Gain = £15,000
Loss = £5,000
Capital Gain = £10,000
Annual Exempt Amount = £9,600 (2008-09)
Taxable Gain = £400
Gain is taxed @18%
Tax Due = £72
If you have made overall Capital Losses in previous tax years, you can use these to offset and reduce your Capital Gains in later years. The losses need to have been claimed before you can use them. You can read more about offsetting previous years’ losses in the artcle “Don’t Forget to Claim Your Losses” on page 26.
When to Make a Tax Return
Capital Gains and Losses are reported to HMRC as part of your Self Assessment, on form SA108.
You are required to complete form SA108 if your overall combined gains and losses exceed the Annual Exempt Amount.
However, less known is that even though you may have no tax to pay, you are stll required to complete form SA108 in any of the following circumstances:
Your total Gains, before deducting losses were higher than the Annual Exempt Amount of £9,600 (Year 2008-09)
You disposed of more than £38,400 of assets (2008-09)
You made an overall Capital Loss for the year and wish to make a claim so that it can be carried forward to offset against future gains.
The Share Identification Rules
So far so good. However, what happens if you have bought shares of the same class in the same company at different times? And what happens if you dispose of some, but not all of your share holding in that company? How do you know which of the shares have actually been sold?
To address this problem, HMRC introduced what are called the “Share Identification Rules” - a special set of rules which lays down a specific order in which to identify the shares sold.
The Share Identification Rules were changed with the introduction of the new “Simplified” Capital Gains Tax regime which came into force from April 2008. However, as we see in the article Share Identification Rules, the new “Simplified” rules have only added another layer of complexity to the Capital Gains Tax rules.
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