What is the difference between Capital Gains Tax and Income Tax?
When you acquire an asset to use or hold for a period, the profit you make when you dispose of that item is treated as a capital gain – and is subject to CGT.
When you buy an item with the intention of selling it for a profit, that transaction is treated as a trade and you should pay income tax on the profit you make on the sale.
The difference between trading (Income Tax) and owning an item as an investment (CGT) can change depending on how you intend to use the item.
The distinction between trading and making a capital gain is important because the rates of tax you pay are different – Capital Gains Tax on most gains (except residential property) being around half the rate of income tax.
What do you pay Capital Gains Tax on?
You only have to pay Capital Gains Tax on your total gains above an annual tax-free allowance. These are currently set at £11,300 for individuals and £5,650 for trusts.
Gifts to a spouse, civil partner or charity are typically exempt from CGT.
Capital Gains Tax is payable on the gain on any ‘chargeable assets’ that you sell. This includes most personal possessions worth more than £6,000 (car not included), business assets, property that is not your main home (exemptions apply) and shares outside of an ISA or PEP.
Depending on the asset, you may be able to reduce tax by claiming a relief.
If you dispose of an asset you jointly own with someone else, you have to pay Capital Gains Tax on your share of the gain.
Seeking Capital Gains Tax advice will help ensure you are meeting your liabilities in the most tax efficient manner.
Are there any exemptions to Capital Gains Tax?
Capital Gains Tax advice should also consider which assets are exempt from CGT when you dispose of them, including: motorcars of any value, moveable possessions worth no more than £6,000, government stock (gilts) and savings certificates, currency for personal use, and debts and most corporate bonds.
Exemptions can also apply relating to your main home, for example when you sell a property that has been your main home for the entire period of your ownership, the gain is completely free of CGT.
Reliefs can apply when you let your home, when you need to live elsewhere for your job or if you move into a care home. Selling part of your garden can also be tax-free if it is sold before or with the house.
What records do I need to keep?
You need to collect records to work out your gains and fill in your tax return. You must keep them for at least a year after the Self Assessment deadline.
You’ll need to keep records for longer if you sent your tax return late or HMRC has started a check into your return.
Businesses must keep records for 5 years after the deadline.
Keep receipts, bills and invoices that show the date and the amount you paid for an asset, any additional costs like fees for professional advice, Stamp Duty, improvement costs, or to establish the market value and the amount you received for the asset – including things like payments you get later in instalments, or compensation if the asset was damaged.
Also keep any contracts for buying and selling the asset (for example from solicitors or stockbrokers) and copies of any valuations.