Are you confused about capital gains tax and when you must pay it? You’re not alone! Many people find it challenging to figure out the different types of capital gains tax. But fear not, we’re here to shed some light on things.
This blog will explain the different types of capital gains tax and the scenarios that require you to pay them. So, whether you’re a first-time investor or a seasoned professional, this guide will help you confidently navigate the world of capital gains tax. Let’s get started!
What Is Capital Gains Tax?
Any profit made from the sale of an investment asset is considered capital gain. This includes the sale of a residential property.
Capital gains can be either short-term or long-term, depending on the time frame. Being a form of ‘income,’ earnings attract taxation, known as capital gains tax or CGT, in short.
Typically capital gains tax (CGT) applies to:
- Shares
- Investment funds
- Second properties
- Inherited properties
- The sale of a business
- Valuables including art, jewellery, and antiques
- Assets transferred at below their market value
A capital gain tax is a type of tax imposed on investments. Whenever an item changes hands between owners, a transfer tax is required. Even though all capital gains are taxed, the way long-term profits are taxed is usually different from how short-term profits are taxed. Individuals can lessen the impact of CGTs by employing tax-efficient financial methods.
How Many Types Of Capital Gains Tax Are There?
Here are the different types of CGT in the UK:
- Standard CGT: This applies to individuals and is based on the profit from selling an asset.
- Entrepreneurs’ Relief: A lower rate of 10% applies to qualifying business owners.
- Investors’ Relief: This applies to investors who own unlisted shares and offers a reduced rate of 10%.
- Annual Exempt Amount: A tax-free allowance of up to £12,300 for individuals.
- Inheritance Tax: This applies to gifts given within seven years of death.
- Non-UK Residents: Non-UK residents who sell a UK property may be subject to a different tax.
Knowing when and how to pay CGTs will help you save money and prevent you from breaking any laws.
When Do You Need to Pay CGT?
Declaring your gain and applying the appropriate rate aren’t the only two steps. The capital gains tax exemption is currently set at £12,300 per year. This is the maximum amount of profit you are allowed to make before having to pay CGT.
If your gains for the tax year are less, you won’t have to pay any capital gains tax. If you don’t use the allowance while selling your assets, you won’t be able to carry it over to the next year.
Are You Liable to Pay the Tax If You’ve Inherited a Property?
When you inherit something, you don’t have to pay CGT until you decide to sell it. You need to know how much the asset was worth when given to you. This is usually the probate value on the date of death, but this can differ. If you sell the asset during the estate period (from the date of death until the estate is settled), there could be a gain, and CGT would be due.
Make sure you track how much an asset is worth and how much you receive from a will. This is because the amount of capital gains tax (CGT) you will pay is based on the difference between the sale price and the price at which you inherited it.
Ultimate Accounting Solutions – Your Ultimate Stop for All Tax Guidance
Please ensure you do not treat CGT planning in isolation from Stamp Duty, VAT, Income tax, and Inheritance Tax. It is crucial to consider how they interact with each other.
At Ultimate Accounting, we are a highly experienced team of Chartered Accountants (ICAEW) and Certified Accountants (ACCA). Offering affordable prices for small & medium-sized businesses, we help our clients achieve their ambitions through hands-on, up-to-date knowledge and prudent advice. Contact us today for a free consultation.
