What is meant by Capital Gains Tax and is there any way which I can reduce the amount I have to pay?

Capital Gains Tax

What is meant by Capital Gains Tax?

In its simplest from Capital Gains Tax is a form of taxation which must be paid on any profits which are made from any of your investments.

Annual Capital Gains Allowance

An individual will only be required to pay Capital Gains Tax on investments which are over a specified amount called the annual capital gains allowance.

What is the Annual Capital Gains allowance for 2010?

The Annual Capital Gains allowance for individuals for 2009-10 is set at £10,100.

What is the percentage required to be paid for Capital Gains Tax?

Following the abolition of the 10% Capital Gains Tax rate all individuals are liable to pay Capital Gains Tax on all capital gains over the £10,100 threshold at a rate of 18%.

How is Capital Gains Tax applied to my assets?

The amount of Capital Gains Tax which an individual will pay depends on the period of time for which they have held that asset.

For example, any asset which is bought after 5 April 1998 a process called “taper relief” will apply. Taper Relief means that the longer you hold the asset for the less tax you will have to pay on any of the gains which you may have made.

How does taper relief work?

Currently there are two kinds of taper relief. They are as follows:

  1. Taper relief for business assets

  2. Taper relief for non-business assets

Which kind carries the best tax benefits?

The tax regime for business assets is the most favourable of the two. Basically it breaks down to if an individual holds an asset for more than two years they will only pay tax on 25% of the gains made by that investment.

Indexation allowance

What is meant by indexation allowance?

If you owned the asset on or before 5 April 1998 you may be able to reduce the taxable gain by claiming indexation allowance. Indexation allowance will reduce the effect of inflation over the years since you first bought the asset.

When will I need to pay Capital Gains Tax?

You will be required to pay Capital Gains Tax on the following gains:

  • If you stop owning, by way of selling, giving away or exchanging any asset or part of that asset

  • If you receive any because of an asset – this may occur when you receive compensation due to any damage to an asset

Are there any gains which are exempt from the need to pay Capital Gains Tax?

The following gains are exempt from the requirement to pay Capital Gains Tax for 2010:

  • The sale of your car

  • The sale of your main home – there are however, some qualifying conditions in relation to this

  • Cashing in on ISAs or PEPs

  • The sale of personal belongings up to £6000 in value

  • Winnings that have been made by gambling, the lottery or the football pools

  • Any money which will be included as part of your income which you will already have paid income tax on

How do I make a Capital Gains Tax return?

If you complete a Self Assessment tax return, there will be a requirement to complete a specific section dealing with Capital Gains Tax.

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For more information on:

  • What happens if I do not complete a self assessment tax return?
  • When should gains be reported to the tax authorities?
  • Are there any ways which I can reduce my Capital Gains Tax bill?
  • Offsetting losses against gains
  • Transferring assets to your spouse
  • Transferring assets to a Charity
  • Making the best use of the exemptions
  • Deferring the Gain
  • Selling Assets and Buying them back
  • Can I sell them and buy them back immediately?
  • What other options are available to me?