In very simple terms, a capital gain is the difference between the price originally paid for an item and the amount that is achieved on sale of that item.
A liability for Capital Gains Tax (CGT) may arise when you sell, gift or transfer an item wherever in the world they are located. Assets are items that you own such as property, shares or other possessions and should the item be owned jointly, the gain will be calculated on the share of the proceeds to which the seller is entitled. For example, if a husband and wife were to equally own an asset, each will usually have a gain on sale based on half the proceeds, unless there is a prior arrangement that the asset is owned in unequal shares.
A chattel is a personal item, such as furniture, and any gain from these assets is generally exempt from Capital Gains Tax if the item is purchased and sold for less than £6,000. If there are joint owners, each has a separate £6,000 allowance to use in connection with their share of the asset in question.
Each individual has an annual exempt allowance of £12,300 for the tax year 2020/21. Should you sell, gift or transfer an asset (or combination of assets) that ‘trigger’ a gain in excess of this sum then tax will be payable on the excess and a tax return to show the capital gain made will need to be completed. There are two main rates of tax and these are based on your taxable income rate band. These however, differ depending on whether the gain is made on property or other assets. For basic rate income taxpayers, a rate of 18% will apply to any gain made in excess of the annual allowance on sale of property, and a rate of 10% will apply to any gain made in excess of the annual allowance on sale of other assets.
For higher and additional rate taxpayers this rate is set at 28% on any gain made in excess of the annual allowance on sale of property, and a rate of 20% will apply to any gain made in excess of the annual allowance on sale of other assets (all rates are correct for the tax year 2020/21).
There are several other rates of tax payable for trustees and business owners and therefore advice should be sought prior to sale in order to calculate the gain made and subsequent taxes due.
To arrive at a final gain amount for any given tax year, any losses made on the sale, gift or transfer of assets can be set against the gains in the same year, plus any additional losses for previous years. However, should your annual exemption allowance not be used in a tax year, this can not be carried forward or backwards to reduce a tax liability. A loss made on an asset that is already free of CGT cannot be claimed or offset.