A capital gain is any gain or profit an investor makes from selling a ‘capital asset’. This profit or revenue falls under the ‘income’ category, so in the year in which the transfer of the capital asset takes place, an individual will need to pay tax on that amount.

Capital Gains is a tax on the profits when an individual sell an ‘asset’ whose value has increased. The HM Revenue and Customs (HMRC) office of the United Kingdom lists various capital assets eligible for capital gains.

Understanding capital assets

List of the assets which come under the category of capital gain is as follows:

  • Shares, bonds (securities)
  • Inherited properties
  • Investment funds
  • Office property
  • Sale of any business
  • House property
  • Registered trademarks
  • Valuables such as jewellery, art, and antiques etc.

Capital assets don’t take into consideration personal goods, such as furniture, clothes and household items.

Currently, capital gains on these properties imply at rates different from income tax rates. Buying such properties, either entrepreneurial or investment, is seen as taking a risk, so the increased risk burden brings greater potential rewards.

An individual pays capital gain on what?

  • Most personal possessions apart from your car which has a worth of £6,000 or more,
  • Property or assets that’s not your primary home.
  • If an individual has let out his primary residence, or used it for business.
  • Shares (except ISA or PEP)
  • Business or chargeable assets

Capital gain is the profit that you make that is taxed, not the sum of money that you earn.

For example

An individual can measure capital gains by subtracting the price paid for the asset from the price at which he/she has sold it.

Mr X purchased a car for £ 40,000 and sold it for £ 60,000-the income is £ 20,000 (£ 60,000 minus £ 40,000).

So, from that £ 20,000, he will deduct £12,000 (as an annual gain exemption). So, £ 8,000 is taxable.

Certain Exceptions

  • Gifts to charities, spouse, or civil partner, as well as something with a ‘short lifespan’ such as watches, clocks, or equipment, are typically tax-free.
  • Individuals having annual gain below £12,000, won’t need to pay any Capital gains Tax (payable only if his/her total yearly gains are above this mentioned threshold)
  • For businesses, Capital Gains Tax is charged only on self-employed sole traders and partnerships. Instead, limited corporations and other forms of organisations are responsible for paying Income Tax.

In nutshell, Capital gains are essentially gain or income that occurs when you sell or pass on a private asset.