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What is capital gains tax?

Capital gains tax (CGT) is a UK tax which applies on any gain realised on the disposal of most assets.  Depending on the amount of this gain, the rate of CGT that will apply is up to a maximum of 28%.  However there is also an annual exemption of just over £10,000.

A capital gain occurs when you purchase a capital asset and later dispose of that asset for more than the purchase price.  A capital asset tends to be an asset that has a long life, for example a property, or shares in a company.  When you sell a capital asset for more than the price paid, you will have realised a capital gain.

There are a number of exemptions that may apply, although the rules are complex.  Some of these exemptions include:

  • An individual’s personal chattels – that is to say personal effects of the individual
  • Personal possessions sold for less than £6,000
  • An individual’s main residence
  • Foreign currency purchased for personal use.
  • Assets held within an ISA or PEP

Most other capital assets will be liable to capital gains tax.

 

It is important to note that capital gains tax applies on “disposal” of an asset.  Disposal may not only be a sale to a third party.  Disposal may also occur if you gift an asset to someone else, or if an asset is destroyed by fire, for example.  This often results in misunderstandings and tax problems.  For example, if an individual gives their second home to another family member free of charge, this can generate a capital gains tax liability, even if no price is paid and the property is held by a relative.

It is therefore important to take care and obtain advice when such transfers or transactions occur.  Taking advice in advance can often result in significant savings.

For specialist capital gains tax advice, please contact our tax team on 020 8429 9245.