What is Capital Gains Tax?
When you buy an item that you are getting with the intention of selling it for a profit, then that transaction is treated as a trade. This means that you will have to pay income tax on the profit you make on the sale. When you acquire an asset to use or hold for a period, the profit you make when you dispose of that item is treated as a capital gain, which is subject to capital gains tax (CGT).
Depending on how you intend to use this item you have bought will determine whether you are considered to be trading or owning an item as an investment. For example, buying a house and renting for a number of years before you sell on for profit would mean you had to pay CGT on the gain. However, if you buy a house with the intention of doing it up to improve its value, then sell at a profit, HMRC will view your activity as a trade and charge you income tax, and possibly national insurance, on the profit you make.
The difference between trading and making a capital gain is important because the rates of tax you pay are different. However, some types of assets are not subject to CGT when you dispose of them. These include:
- moveable possessions worth no more than £6,000
- motorcars of any value
- government stock (gilts) and savings certificates
- currency for personal use
- debts and most corporate bonds.
Any assets that you give to charity are free of CGT. There is also a general exemption from CGT for gifts between husband and wife or civil partners who are living together in that tax year, but not for gifts to other relatives. Another way to avoid CGT as long as you are prepared to take a risk is by reinvesting. You are able to defer paying CGT on gains by investing the amount of the gain in shares issued under the Enterprise Investment Scheme or shares or bonds issued under the Social Investment Tax relief scheme. For example, investing your gain under the Seed Enterprise Investment Scheme (SEIS) may halve the amount of tax your pay on that gain, up to to £100,000 per year in SEIS.
At Elite Financial Accounting we can help you make sure you aren’t paying any unnecessary CGT and can offer expert advice on how best to manage this.