Capital Gains Tax (CGT) usually occurs when the tax imposes on the gains you earn from selling, transferring or disposing of capital assets or properties that have risen in value.
These capital assets include:
- Property which is not your primary home
- Personal belongings of an individual worth £ 6,000 or more (apart from your car).
- Your main home (if you’ve used it for business or let it out)
- Various business assets (land, plant and machinery, buildings, trademarks etc.)
When you earn profit by selling a capital asset that you own, Capital Gains Tax comes into existence. The crucial thing to consider is that the calculation of taxes is on the profit you receive and not the price you sold. As the name implies, It’s all about gain.
The Capital gain tax rate that usually charged on an individual depends on two things:
1. Whether an individual comes under basic rate, higher rate, or additional rate taxpayer band
2. The type of asset that an individual sold,
The CGT rates for the 2020/21 tax year are as follows:
| Tax rate band | CGT on residential property | CGT on other assets |
| Basic-rate tax band | 18% | 10% |
| Higher/additional rate tax band | 28% | 20% |
How to calculate capital gain tax?
CGT is not about declaring your gain and applying the applicable rate. There is an annual CGT allowance or the Annual Exempt amount of
- £ 12,300 (For an individual)
- £6,150 (For trusts)
Before CGT is applied, this is the amount of profit you can make. If your earnings in the tax year are below this amount, then there is no CGT liability. However, if your profit exceeds above £ 12,300, as an individual and £6,150 as a trust, then you need to pay capital gain on your fixed asset sold.
However, there is an exception on the assets you give or sell to your husband, wife or civil partner, you do not pay Capital Gains Tax, unless:
- In that tax year, you separated or divorced and did not live together at all,
- You gave them goods for selling.
Moreover, certain other exceptions are:
- An individual doesn’t pay Capital Gains Tax if he/she sells their primary place of residence or personal possessions below £6,000.
- Gifts gave as a charity and various amateur sports clubs
- Different personal or private motor cars
- Savings certificates, SAYE contracts, and premium bonds
- Betting winnings such as lottery