Capital Gains Tax

If you make a substantial amount of money on any assets you invest in, such as shares, property or paintings, then you may be liable for Capital Gains Tax. You will only be liable for it when you come to sell the asset, or even give it to someone else. The tax is not paid unless a transfer of ownership occurs, and you do get an allowance of currently £8,500 per year.

Although very few people actually have to pay capital gains (about 0.2% of tax payers), it is worth taking it into account if you are investing in assets. To reduce any tax you might pay on capital gains in shares, it is a good idea to make full use of your ISA allowance. You can currently shelter £7,000 of shares per year in an ISA.

You can also deduct any costs you incurred in buying and selling the asset, as well as any costs necessary to increase the value. For instance, if you bought a property for £100,000 and spent £60,000 on it in improvements, then sold it for £200,000, you would only be liable for capital gains on the £40,000 profit you made, not the full £100,000 increase in value. You may also be able to deduct any estate agent, solicitor and other fees you incurred in buying and selling the property.

You can also make transfers between spouses without being liable for capital gains tax. So if one of you had shares to sell that would exceed the £8,500 allowance, you could transfer some to your spouse to use their allowance as well.

You will also need to take into account something known as ‘taper-relief’ or you may end up paying too much in tax. Taper relief is designed to reduce the amount of tax you pay if you have owned an asset for a long time, to cover things such as appreciation due to inflation. Taper relief reduces the amount of gain that you must pay tax on to less than the standard 100% of total gain after your allowance. The reduction that is granted depends on the type of asset. Business assets include things such as shares in companies listed on the Alternative Investment Market (AIM). Most assets though, are called non-business assets. The reduction rates are set out in the table below:

Business Assets Non-Business Assets
Years held Gain liable for CGT Years held Gain liable for CGT
0 100% 0 100%
1 50% 1 100%
2+ 25% 2 100%
3 95%
4 90%
5 85%
6 80%
7 75%
8 70%
9 65%
10+ 60%

As you can see, it has turned into quite a complicated tax, so if you think you may be liable for it, it is likely to be worth betting some professional advice on it.