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Capital Gains Tax (CGT) is a levy which may need to be paid when you sell certain types of asset, such as residential or commercial property, stocks and shares or other investments such as antiques, artwork – paintings, sculptures – and cars.

Strictly speaking only individuals pay CGT but companies don’t escape as any gain they make is taxed within their corporation tax bill. Typically, a capital gain is generated when the asset or investment is sold, but it can also occur when you give an asset away.

The proceeds from selling property is normally liable if it was an investment property (one you rented out or intended to rent out) or if it was a second (or third or fourth etc) home. However if you purchase a property and renovate it to sell it on at a profit then CGT is not paid but income tax (or corporation tax if you are operating as a limited company) will be due.

Essentially, CGT is charged on the proceeds of a sale, or the market value of a gift, less its original cost, and after any selling and improvement expenses have been taken into account.

Exemptions

Although CGT raises the meagre sum (compared to income or corporation tax) of £2.5bn a year, it is unlikely to be abolished, as it would open up a huge tax avoidance loophole which would allow individuals and corporations to convert income into capital. For example taxpayers might be tempted to turn down salary in favour or gifts or company shares which they could then sell on to raise money tax-free.

Since its introduction by Harold Wilson’s Labour government in 1965 CGT has been a complicated and complex tax. For example on its introduction it was agreed that gains made prior to 1965 would not be taxable and this led to taxpayers having to make complicated calculations on their tax returns. For example if you bought 100 shares for £1,000 in 1960 and sold them in 1970 for £3,000 you had to find out what they were worth in 1965. Let’s say the figure was £2,000 then you only had to pay tax on the £1,000 gain since 1965. Fairly simple for listed companies but more complicated dealing with unlisted (private) companies, art, antiques etc. Also if in 1965 your shares had lost value to £900 you could be faced with a much higher bill. As I say, all very complicated.

Over the years there have been all sorts of indexation allowances to allow for inflation such as the recently abolished indexation allowance. Then there was taper relief for businesses and so on.

Well it’s a bit easier now. In his 2008 Budget the Chancellor announced that in order to simplify the tax all the allowances would be swept away and CGT would be payable on the entire gain without any allowance for inflation; but it would be payable at 18% instead of 40% as previously charged.

This did not meet with universal acclaim however as it now meant that people who started and built up a business then sold it to retire would now have to pay more tax so a change was made that means such people now pay a lower rate of 10% on the first £1 million gain. This is referred to as “entrepreneurs relief”.

Restructuring incentives

Over the years business organisations such as the Confederation of British Industry, the British Chambers of Commerce and the Institute of Directors have lobbied governments to abolish or reform CGT for certain types of asset in order to stimulate investment and give additional incentives to talented staff.

Their persistence paid off big-time when the Chancellor confirmed a CGT exemption for companies disposing of substantial shareholdings in their main business or in their subsidiaries.

Under the changes, designed to help companies restructure quickly and flexibly in response to new opportunities, the disposal of stakes of 10% or more in trading companies will not be taxable.

This means that companies wishing to restructure for commercial reasons will be able to do so without being constrained by CGT.

The Chancellor has also eased CGT on the sale of other stocks in recent years in a bid to encourage employee share ownership and tempt talented managers to join fast-growing businesses. Enterprise Investment Scheme reinvestment relief allows CGT to be deferred when the proceeds of a sale are used to buy shares in certain small unquoted companies.

Main exemptions

For private individuals a number of items are exempt from Capital Gains Tax, including:

  • Your main residence
  • Your private car
  • Jewellery, paintings and antiques worth less than £6,000
  • Savings Certificates
  • Premium Bonds
  • Betting, lottery or pools winnings
  • The first £9,600 of chargeable gains from any other source

This article is designed as a general introduction to what is a very complex piece of legislation. It is my intention to gradually deal with specific areas of Capital Gains Tax in future postings. However if you have any questions please do post a comment asking for further information or click here to send an email to me and I’ll be pleased to post a specific answer or contact you to discuss your personal circumstances.

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Category: Taxation

3 Responses to “What is Capital Gains Tax?”

  1. James Green says:

    Hi George,

    Currently you can rent out a property that was your principal or main home for three years without being caught in the CGT net. The rules consider that in this situation the last three years of ownership count as if the house was still your home. If you sell after 3 years – say 4 or 5 – then you will get caught by CGT but only on any gain made on the value of the house at the end of the three year period.

    There are some other more complex things you can do if you are going to be hit by CGT after the 3 years are up but they are probably not relevant at the moment.

  2. GeorgeKF says:

    Thanks for this. Most interesting. One question though. I relocated for my work last year and after six months I bought a new house closer to where I now work. The old house has been on the market for some time and in the present state of the market I have decided to rent it out. If I sell it in two or three years will I have to pay CGT on this house as it isn’t my main place of residence?

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