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Introduction to Capital Gains Tax

Thursday 13th February 2014

This is a basic introduction to Capital Gain Tax (CGT) for individuals.

CGT is separate to Income Tax in that it is charged on different funds you receive, however the rate of CGT that you will be charged is linked to your income - we will come back to this below.

Firstly, every individual in the UK is entitled to a CGT allowance each tax year which is currently set at £10,900. This means that the first £10,900 of Capital Gains are tax free.

After this allowance has been used up Capital Gains are taxed at 18% and 28% depending on if you are a higher rate tax payer.


Let's take an example:

Mary sells an asset for £200,000, the asset originally cost her £100,000 so she has made a gain of £100,000.

We then deduct the CGT allowance of £10,900 which leaves a taxable gain of £89,100

Mary has income during the year of £25,000 from her day job and no other income. £9,440 of this is income tax free (Income Tax allowance) leaving £15,560 to be taxed at 20% (basic rate tax level).

The basic rate tax band for 2013-14 is income up-to £32,010. Minus the £15,560 of income that Mary has had taxed in this band leaves £16,450 of the basic rate band still available for the Capital Gain to be taxed at. Capital Gain in the basic rate band are taxed at 18%.

The remaining gain of £89,100 - £16,450 = £72,650 will be taxed at 28% in the higher rate band.

£16,450 x 18% = £2,961

£72,650 x 28% = £20,342

So from the £100,000 gain Mary has to pay £23,303 in Capital Gains Tax leaving her to enjoy £76.697.

That is the simplest form of explaining how Capital Gains Tax is worked out, there are a great number of exemptions, reliefs and scenarios where CGT is not due, it completely depends on the full details of the individual transaction. Tax advice before you sell an asset is therefore very important.

For more information please do get in touch.

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