Basics of capital gains tax
Capital gains tax is a tax that will affect most businesses and individuals at some point. You don’t need to know all the ins and outs of the legislation. However, it pays to be aware of key information such as why it is imposed, when it applies, and how to pay it. In this post, we’ll cover the basics of capital gains tax along with the main points that individuals and business owners should be aware of.
The purpose of capital gains tax
In the UK, capital gains tax is present on profits gained through the sale or disposal of an asset that’s increased in value. The tax doesn’t apply to the entire value of the asset in question, just the amount gained. An asset is considered to have been ‘disposed of’ in the event it is sold, given to someone else, traded for something else, or compensation is obtained for loss or destruction of the asset.
Another important distinction to be aware of is that this tax isn’t applied to every asset disposed of, only those classed as ‘chargeable assets’. These include:
- Shares not in an ISA or PEP.
- A majority of personal possessions valued at more than £6000, excluding your car.
- Business assets such as tools and machinery.
- Property that isn’t your main home.
- Your main home if it has been let out or used for business purposes.
Tax-free allowance
You are only required to pay capital gains tax on total asset gains that go above your tax-free allowance. This is an annual allowance that makes it so you won’t pay capital gains tax on gains valued below £6000 (£3000 for trusts). In addition, you may be able to reduce your tax bill further by claiming reliefs, although only certain kinds of asset will be eligible for certain kinds of tax relief. A chartered accountant can advise on how best to maximise your tax savings depending on your situation. Jan McDermott Chartered Accountants offer dedicated support for those looking to claim Business Asset Disposal Relief.
Capital gains tax for businesses
Businesses that are registered as limited companies pay tax on gains through Corporation Tax as opposed to capital gains tax. It’s a bit different for sole traders and partnership businesses, as you and the business are considered to be the same entity. As such, any capital gains made throughout the year must be declared in you Self Assessment tax return. Making use of a qualified accountants for tax returns will guarantee you fill this out properly and submit on time.
Assets used for trading are generally accepted to get used up during any 12 month period. This makes them short-term assets. Profits made from their sale (which counts as disposal) are therefore taxed in the regular way business profits get taxed in the UK.
Assets that remain for over a year are liable to capital gains tax. It’s important to note that capital gains tax can apply to fixed assets that aren’t tangible items too. The best examples are trademarks, brands, shares, and patents held by the company. More complexity can arise in this area of tax due to how the business utilises these assets and the reasons behind their disposal.
Capital gains tax for individuals
As individuals, we’ll only have to worry about capital gains tax at a few select points in our lives. Nevertheless, it will come into relevance when you come to dispose of a valuable asset such as a house. These events are usually linked to significant decisions, so it’s important we answer some of the big questions around capital gains tax affecting individuals.
Most cars won’t appreciate in value over the course of their lifetimes, so their disposal won’t typically be subject to capital gains tax. However, if this is the case, there still won’t be any charge unless the car has been used for business purposes.
Properties are often the first assets we think of when considering what will go up in value over time. While it’s true that property sales usually result in substantial gain, this won’t incur tax so long as the following is true:
- It wasn’t bought with the intention of making gains.
- It’s your only home which has been lived in as your primary residence for the entire time it has been owned.
- The property hasn’t been let out under your ownership.
- The building and grounds don’t exceed 5000 square metres.
Certain assets are not subject to capital gains tax after their disposal, regardless of the increases in their value. These include:
- Premium bonds and other government ‘gifts’.
- Gifts given to a spouse, civil partner, or registered charity.
- Investments in ISAs or PEPs.
- Winnings from competitions, bets, or the lottery.
Trusted tax accounting and business support services
Looking for a capital gains tax accountant near me? At Jan McDermott Chartered Accountants, our services go above and beyond accurate bookkeeping. We provide continued support designed to benefit your business’s financial position. Crucially, our team understands how difficult it can be to keep on top of the various types of tax that are out there and when they apply. That’s why we’ve intentionally sought to gain experience in helping businesses of various types, in a wide range of sectors with managing their accounts. Contact us today and a friendly member of the Jan McDermott team will be happy to discuss what you need.