If you give an asset away
If you give an asset away, you normally look at what it is worth, not what you get for it. The same is true when you sell it for less than its full worth in order to give away part of the value.
Three years ago, you bought a flat costing ￡75,000 for your daughter to use.
The flat is now worth ￡100,000.
You now give it to your daughter.
She might not pay you anything for it; or you might let her have it for less than what it is worth, say she pays you ￡60,000.
Either way, you have made a gain of ￡25,000 (￡100,000 less ￡75,000).
If you dispose of an asset you had been given
You might dispose of an asset that you had received as a gift. When you work out the gain you normally use the market value of the asset when you received it.
Your sister gave you a garage worth ￡5,000.
You did not pay anything for it.
Later, you sell the garage for ￡8,000.
You are treated as making a gain of ￡3,000 (￡8,000 less ￡5,000)
If you have inherited an asset
If you inherit an asset, the estate of the person who died does not pay Capital Gains Tax at that time. If you later dispose of the asset, you work out the gain by looking at the market value at the time of the death.
Your brother had acquired some shares for ￡2,000.
When he died, he left them to you.
No CGT is payable at that time.
At the time of his death, the shares were worth ￡6,000.
Later, you sell them for ￡9,000.
You have made a gain of ￡3,000 (￡9,000 less ￡6,000).
Some other cases where you might have to pay Capital Gains Tax
You may also have to pay CGT if you dispose of part of an asset or exchange one asset for another. In addition, CGT may be payable if you receive a capital sum of money from an asset without disposing of it, for example if you receive compensation when an asset is damaged.
What if I transfer an asset to my husband or wife?
If you sell or give an asset to your husband or wife while you are legally married and living together, that does not give rise to a Capital Gains Tax charge.
If your husband or wife later sells the asset, he or she will work out the CGT at that time by looking at what you paid for the asset.
What if I give an asset to charity?
If you give an asset to a registered charity you will not have to pay CGT.
What assets might lead to a Capital Gains Tax charge?
Most sorts of assets can lead to a CGT charge when you dispose of them, for example:
- shares in a company
- units in a unit trust
- land and buildings (but see below - 'What about my home?')
- higher value jewellery, paintings, antiques and other personal effects (see next section)
- assets used in a business, such as goodwill.
CGT is chargeable whether the assets are in the UK or abroad.
What assets do not lead to a CGT charge?
Some assets are exempt. For example, you will not have to pay CGT on
- your private car
- cash held in sterling
- any foreign currency held for your own or your family's personal use
- jewellery, paintings, antiques and other personal effects that are individually worth ￡6,000 or less (if you have a set, for example a set of chess figures, you do not pay CGT if the value of the set as a whole is ￡6,000 or less)
- Savings Certificates, Premium Bonds and British Savings Bonds
- UK Government stocks ("Gilts")
- assets held in an Individual Savings Account (ISA) or Personal Equity Plan (PEP)
- betting, lottery or pools winnings
- personal injury compensation.
What about my home?
You will not have to pay CGT when you dispose of your home if all the following conditions are met.
- Throughout the period that you owned it, it was your only home.
- You did actually use it as your home all the time that you owned it.
- Throughout the period that you owned it, you did not use it for any purpose other than as a home for yourself, your family and no more than one lodger.
- The house and garden do not exceed 5,000 square metres (about one and a quarter acres - roughly the size of a football pitch).
Even if not all of these conditions are met, you may still be entitled to relief against all or part of the gain.
Shares and unit trusts
You may have bought or acquired in other ways shares or units in a particular company or unit trust on a number of different occasions and now dispose of some of them. If so, there are special rules for identifying which of the shares or units you have sold, and for working out the gain.
Shares in the company where you work
You may have to pay CGT when you sell shares in the company where you work, but there are some special reliefs that may help you keep your tax bill down.
How do I work out the CGT that has to be paid?
Start by listing all the assets that you have disposed of in the tax year (6 April to 5 April in the following year). You can ignore exempt assets and disposals that do not give rise to a Capital Gains Tax charge. You may be able to ignore the disposal of your own home.
Work out the gain on each asset.
There are many reliefs available that reduce or defer CGT.
- Some reliefs are available to many people. For example, taper relief reduces the amount of a gain charged to tax the longer an asset has been held.
- Other reliefs are available only in special circumstances.
- You may deduct some of the costs of buying, selling and improving assets when working out your gain.
- If you have made a loss, you may be able to set that against your gains.
You can then add up the total of your gains less reliefs and allowable losses to calculate your net gains for the year.
If the total of your net gains in a tax year is less than a certain amount, called the annual exempt amount (AEA), you will not have to pay Capital Gains Tax For the tax year 2005-06 the AEA is ￡8,800 (up from ￡8,500).
If your net gains are more than the AEA you pay CGT on the excess.
When can I be sure that there is no Capital Gains Tax to pay?
If the total value of all the assets that you dispose of in a tax year (ignoring exempt assets) is less than the AEA, then you will not have to pay CGT on those assets.
If you know that the total of the gains on the assets that you dispose of (apart from exempt assets) is less than the AEA even before thinking about losses and reliefs, then you will not have to pay CGT on those gains. However, you may still have to show the gains on your tax return.
Even if you have not disposed of any assets during a tax year you may still have to pay Capital Gains Tax, for example, if the gains of a trust or company with which you have some connection are attributed to you.
What are the rates of Capital Gains Tax in 2006/2007?
- 10% to the extent that your total income after allowances is less than the top of the starting rate band (￡2,150)
- 20% to the extent that your total income after allowances is less than the top of the basic rate band (￡33,300) and has not been charged at 10%. Note that this charge is at 20%, not the basic rate of income tax
- 40% above the basic rate limit (more than ￡33,300).
In 2006-2007 you have total income of ￡30,000. Your personal allowances are ￡5,035. So, your income liable to income tax is ￡24,965 (￡30,000 - ￡5,035).
You have an amount chargeable to CGT of ￡15,000. Note: this is after deduction of the AEA of ￡8,800.
The starting rate limit is ￡2,150 and the basic rate limit is ￡33,300.
You work out CGT as follows.
- Firstly, you add the amount chargeable to CGT (￡15,000) on top of your income liable to income tax (￡24,965), giving a total of ￡39,965.
- As none of the amount chargeable to CGT is within the starting rate limit, you do not tax any of it at 10%.
- As ￡8,335 of the amount chargeable to CGT is within the basic rate limit (￡33,300 - ￡24,965) you tax this amount at 20%.
- As the balance of ￡6,665 (￡15,000 less ￡8,335 is above the basic rate limit, you tax this amount at 40%.
- Therefore, the amount of Capital Gains Tax you will have to pay is
￡8,335 x 20%
￡6,665 x 40%
Unless you are sure that you do not have to pay CGT, you should ask for further information. The reliefs might mean that you do not have to pay any CGT this year.
If the only reason that you do not have to pay CGT is because you have deducted losses from your gains you will need further information. This is because you can only use losses that arose in 1996-97 or later if you have made a claim by notifying your Tax Office.
If you think that you might have losses that are greater than your gains for the year, then you should find out more about CGT. If you notify your Tax Office you may be able to use the losses to offset gains in a future year.