A liability to UK capital gains tax may arise when an individual sells an asset that is not exempt. The tax liability may be reduced by taking into account all costs associated with acquisition and disposal, and available reliefs and allowances.
How is a capital gain computed?
When an asset is sold, the capital gain is computed by deducting from the sale proceeds the acquisition cost of the asset, incidental costs of acquisition or sale and any amounts spent on enhancing the asset. A liability to capital gains tax arises when a chargeable disposal occurs on the sale or gift of a chargeable asset; a part disposal; loss or destruction of an asset or the receipt of a capital sum such as compensation for damage to an asset.
Rates of capital gains tax
Rates of UK capital gains tax paid by an individual are computed in relation to the basic rate income tax threshold which is £35,000 for 2011/12. Capital gains are charged at the 18% basic rate of capital gains tax if the individual’s combined taxable income and capital gains do not exceed the basic rate tax threshold for the tax year ending on 5 April. Any capital gains for the year that exceed the basic rate limit are taxed at 28%. The capital gains tax rate for trustees of a trust or the representatives of a deceased person is 28%. Capital gains tax is payable by 31 January following the tax year in which the gains arise. Capital gains tax is charged on individuals who are resident or “ordinarily resident” in the UK, business partners, trustees and personal representatives of a deceased person. An individual is considered a resident if that person is habitually resident in the UK, even if not he/she is not resident in a particular tax year.
CGT exemptions and allowances
Certain assets are exempt from capital gains tax and any gain or loss on their sale is therefore not included in the tax computation. These assets include the principal private residence of the taxpayer; motor cars; and most life assurance policies. Entrepreneur’s relief reduces the capital gains tax rate to 10% for gains on the sale of businesses up to a lifetime limit of £10 million for each individual. All taxpayers are entitled to an annual exemption which represents £10,600 for individuals in 2011/12. Most trustees are entitled to a lower annual exemption of £5,300 and personal representatives receive the £10,600 exemption for the year of death and the following two years. If a taxpayer makes a loss on the disposal of a chargeable asset, this is deductible from chargeable gains of the same tax year, and excess capital losses may be carried forward to future tax years.