What Is Capital Gains Tax?
As it quite clear from the term, Capital Gains Tax, also referred as CGT, is tax applicable on capital gains and has gained its momentum in the United Kingdom post World War II and that was the time when there was a rapid growth in property values, thus in order to make greater capital gains, the property dealers started to leave their office blocks empty deliberately so that a rental income could not be established. Introduced in the year 1965 by then chancellor James Callaghan, Capital Gains Tax is defined as a tax on the profit or gain that you make when you sell or dispose of your asset(s). What is important to note here that is that the mentioned tax is applicable on the gain that you have made by selling of the asset, and not on the selling price i.e. not on the amount of money you receive.
For example: If you have bought a painting for £7,000 but have sold it off at £27,000, then you have made a gain or profit of £20,000. So, you have to pay the Capital Gains Tax on £20,000, and not on £27,000.
Definition of Capital Gains Tax
Capital Gains Tax is a tax that can be payable if you sell certain large items of equipment.
If you are an individual, then you can be liable to pay Capital Gains Tax on your personal assets, however if you are a sole trader or a partner in a partnership, then Capital Gains Tax might be applicable on the assets owned by your business. As per HMRC, you, either as an individual or as a sole trader/partner in a partnership, have to pay Capital Gains Tax on any gain or profit when you sell or dispose of the following -
Once you have made a considerable gain or profit by selling of your asset, you have to see if the gain earned falls within tax-free allowance or not. If it does, then you don’t have to worry about a thing, however if it is over the tax-free allowance then it is better to calculate the Capital Gains Tax applicable on the profits. However, life is beautiful and there is nothing in this world which cannot be fixed. If you want to reduce your total taxable gains, then you can do so by reporting your losses on a chargeable sheet to the HMRC. Once you have reported a loss to HMRC, the amount will be deducted from the gains or profits that you have made for that financial year. If your total taxable gain or profit is still high and is above the tax-free allowance, then you use and deduct pending or unused losses from previous financial or tax years and if by doing so, your total taxable gain comes down to the tax-free allowance, then you can save the losses of present tax year and carry it forward to a future tax year. HMRC allows you to claim your losses up to four tax years, after the end of the tax year in which you have sold off or disposed off the asset. In order to work out your gains in a better way, it is important to keep all records with you i.e. keep receipts, bills and invoices showing the date and the amount that:
- Personal possessions worth £6,000 or more.
- Any property that is on your name, except your main home.
- You can sell or dispose of your main home provided you have either given it on rent, used it for business purpose or it is very large for a single person to stay in it.
- Business assets such as:
- Lands and buildings
- Machinery and plant
- Fittings and fixtures
- Registered trademarks and copyrights
- Reputation of your business
- Shares that are not in an ISA or PEP.
In order to reduce the burden on its citizens, HMRC has declared a fixed tax-free allowance i.e. Capital Gains Tax is applicable only if your overall gains from selling of your assets is above your tax-free allowance, also called as Annual Exempt Amount. The tax-free allowance is:
- As a proof of any additional costs such as fees for a professional service, Stamp Duty, improvement costs or if you have to establish the market value of the asset.
- Any payment that you have got later in installments or any compensation if the asset was damaged.
In order to stay within the boundaries of law, it is important to work out your gains and applicable Capital Gains Tax on it, after you have disposed off an asset. As mentioned above, a gain is nothing but the difference between the price on which you have brought the asset and the price you have sold it for and in order to get the correct amount, it is always better to use the market rate of the asset, unless:
- £6,000 for trusts i.e.
- If the assets are put into a trust, then the Capital Gains Tax is paid by the person who is selling those assets to the trust or by the person who is transferring the asset, also called as settler
- If the assets are taken out of a trust, then the trustees have to pay the applicable Capital Gains Tax on the profits if they are selling or transferring the mentioned assets on behalf of a beneficiary.
- Certain assets and any gains from them are exempted from Capital Gains Tax, such as:
- ISAs or PEPs
- Betting, lottery or pool winnings.
- UK government gilts and Premium Bonds.
You can work out total taxable gains by following the below mentioned steps:
- You have given it away to your spouse or civil partner or to a charity;
- You have sold it for lesser price in order to help the buyer;
- You have inherited the asset and don’t know the inheritance tax value;
- You owned it before April 1982.
- Work out the gain or profit made from each asset, and you owned the asset in partnership, then calculate your share of the asset.
- Combine or add the gains from each asset to calculate total taxable gains.
See if there are any pending or unused losses from previous tax years. In United Kingdom, a tax year runs from 6th April of current year to 5th April of the next year.
- If your total taxable gain falls within the tax-free allowance then you don’t have to pay any Capital Gains Tax on the gains made by you; however in any other case, you are required to report the same to the HMRC and pay the applicable Capital Gains Tax.
- If your total taxable gains are above the tax-free allowance then you have to report it to the HMRC. However, before you go ahead and report , you need to take care of the following:
- List down what all you are going to report and make calculations for each listed capital gain or loss.
- Ready what all you have regarding the assets that you have disposed off i.e. collect all information from your records about the costs and the proceedings that you received for each asset.
- List down all the relevant and minute details, including any reliefs you are entitled to.
- Once you have all the required information by your side, you must report latest by or before 31st December after the tax year in which you have made the profit or the gains.
- HMRC will send you your payment reference number and options to make the payment.
- Once you have reported, you can pay the applicable Capital Gains Tax either:
- When you are filing your Self-Assessment Tax Return or
- By using the real time Capital Gains Tax Service. Using this service you can straightaway pay the tax. However, in order to use the service, you have to be a UK resident and would need a Government Gateway User ID and password. If you don’t have one, then you have to create one when you report.
How to add Capital Gains in Nomisma?
You can refer through below video where you can learn how to add Capital Gains Note in Nomisma –
Why Nomisma Solution Self Assessment Software?
As a human being, it is quite possible to miss out few receipts or on the deadline by which you should have paid the Capital Gains Tax and thus it is always better to invest in an intuitive software that can help you in submitting your tax returns directly to the HMRC within the deadline. Our Self-Assessment Software is equipped with rich features such as unlimited self-assessment submissions, client management, dashboard, work-flow management, HMRC compliance etc, using which you can submit unlimited self-assessment returns directly to the HRMC and can also confirm if HMRC has accepted your submissions or not.
If you have no knowledge of the software, Nomisma offers you a solution for that as well. It has its 14-days trial demo software with the help of which you can get a detailed overview of the software starting from showing work status to submitting tax returns to the HMRC etc. Try Nomisma Today.
If you are facing any problem to add Capital gains in Nomisma, You can call our experts at +44(0)20-3021 2326 or e-mail us at [email protected]