Capital Gains Tax

UK Capital Gains Tax Explained

A capital gain is the term used to refer to the wealth you acquire when you sell an asset off; these are mostly tangible, though some intangibles also qualify for the capital gain. It is levied on the profit that you make on that asset that you've sold, whether the intention was not of trade is irrelevant. The percentage of tax you have to pay depends on how much that item was sold for and how long it was kept. Some items are however exempted from this list, such as you PPR (Principal Private Residence). There is also a tax exemption, allowable amount of £ 3000 per annum.

That is the very basics of UK capital gains tax, let's look at it in more detail and review the changes that have been made to it recently.

Apart from the annual allowance, you can even claim an indexation allowance for certain assets that were sold off / disposed before April 6th 2008

See the brief table below to check what kind of allowances are available and what types you may qualify for

Annual Exempt Amounts for individuals and trustees

Annual Exempt Amount

2007-08 (£)

2008-09 (£)

Individuals, personal representatives & trustees for vulnerable persons

9,200

9,600

Other trustees

4,600

4,800

Personal representatives get the Annual Exempt Amount for the tax year in which an individual dies and the next two tax years.

For the post 2008 - 09 years, you will need to be UK domiciled to avail these allowances.

Tax rates for different years

2008-09

Single rate for all of 18%

2007-08

The rates of Capital Gains Tax for individuals for 2007-08 are 10 per cent, 20 per cent and 40 per cent depending on your income.

Capital Gains Tax 2007-08 tax rates and tax bands for individuals (the old system)

2007-08 Capital Gains Tax rates

When to use it

2007-08 tax bands

10%

If the starting rate band has not been fully used against your taxable income, you can use the remainder to set against your capital gains

Starting rate band: £0-£2,230

20%

If the basic rate band has not been fully used against your taxable income, you can use the remainder to set against your capital gains

Basic rate band: £2,231-£34,600

40%

Once the starting rate bands and the basic rate band have been fully used, you pay Capital Gains Tax at 40%

Higher rate band: Over £34, 600

The rate of Capital Gains Tax for most trustees and all personal representatives is 40%.

An example to make it more explainable

2007 - 08 capital gains = £ 50,600.

First calculate your income tax liability
lets suppose it comes out to be £ 20,000.

The first band is utilized first.

The rest of your income is charged in the basic rate band, since the remainder is lower than £ 32,370

The remaining £ 14,600 is used to charge you capital gains of the same amount within the basic band.

In short:

£14,600 at 20% = £ 2,920
£36,000 at 40% = £14,400
Tax due = £17,320

Indexation Allowance

Any asset purchased and sold between April 1998 and April 2008 also qualifies for indexation allowance.

Indexation allowance gives you certain exemption by taking into consideration the amount or worth increase in your asset due to inflation, and then removing it from the gain. After April 1998 this was replaced with the taper relief. Note that this relief is only available up to the nil value or the gain, it cannot possibly create a loss.

An inflation table, one that's used to find out the allowance looks something like this:

1982

1983

1984

1985

1986

1987

1988

1989

Jan

 

0.968

0.872

0.783

0.689

0.626

0.574

0.465

Feb

 

0.960

0.865

0.769

0.683

0.620

0.568

0.454

Mar

1.047

0.956

0.859

0.752

0.681

0.616

0.562

0.448

Apr

1.006

0.929

0.834

0.716

0.665

0.597

0.537

0.423

May

0.992

0.921

0.828

0.708

0.662

0.596

0.531

0.414

Jun

0.987

0.917

0.823

0.704

0.663

0.596

0.525

0.409

Jul

0.986

0.906

0.825

0.707

0.667

0.597

0.524

0.408

Aug

0.985

0.898

0.808

0.703

0.662

0.593

0.507

0.404

Sep

0.987

0.889

0.804

0.704

0.654

0.588

0.500

0.395

Oct

0.977

0.883

0.793

0.701

0.652

0.580

0.485

0.384

Nov

0.967

0.876

0.788

0.695

0.638

0.573

0.478

0.372

Dec

0.971

0.871

0.789

0.693

0.632

0.574

0.474

0.369

 

 

 

1990

1991

1992

1993

1994

1995

1996

1997

Jan

0.361

0.249

0.199

0.179

0.151

0.114

0.083

0.053

Feb

0.353

0.242

0.193

0.171

0.144

0.107

0.078

0.049

Mar

0.339

0.237

0.189

0.167

0.141

0.102

0.073

0.046

Apr

0.300

0.222

0.171

0.156

0.128

0.091

0.066

0.040

May

0.288

0.218

0.167

0.152

0.124

0.087

0.063

0.036

Jun

0.283

0.213

0.167

0.153

0.124

0.085

0.063

0.032

Jul

0.282

0.215

0.171

0.156

0.129

0.091

0.067

0.032

Aug

0.269

0.213

0.171

0.151

0.124

0.085

0.062

0.026

Sep

0.258

0.208

0.166

0.146

0.121

0.080

0.057

0.021

Oct

0.248

0.204

0.162

0.147

0.120

0.085

0.057

0.019

Nov

0.251

0.199

0.164

0.148

0.119

0.085

0.057

0.019

Dec

0.252

0.198

0.168

0.146

0.114

0.079

0.053

0.016

 

 

 

1998

Jan

0.019

Feb

0.014

Mar

0.011

 

Multiply these factors with the cost to calculate your allowance.

This allowance is calculated separately if additional costs were incurred on the house in subsequent years. Such as improvement costs on your house.

The recent changes were met with a huge attention from the press and the tax payers. Instead of the old 10 % - 46 % bracket, there is now a fixed rate of 18 %.

In the new system, it will be very attractive for people to set up LLP's (limited liability partnerships). In simplest words, it just limits you liability in case of equity threatening litigations, and it helps avoid the double taxing corporate system.

It will also attract companies to pay off their employee bonuses with the help of shares, since shares will incur a lower tax amount when disposed of.

Note: all rates and allowance figures are official HMRC quoted.

 



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