Basic Capital Gains Tax (CGT)

When do I have to pay capital gains tax (CGT)?

As a general rule, you have to pay CGT at a rate of 18 per cent if you sell something for more than you paid for it. Shares, land, buildings, part of a business and expensive antiques or jewellery are the sorts of things that will usually attract a CGT liability. However, you may also have to pay CGT if you merely give something away or receive compensation or prize money.

Exceptions to the tax

If your gains come to less than £10,100 for the tax year 2009-10, you will not have to pay any CGT.

Capital gains tax explained

You also do not have to pay CGT if you are selling or otherwise passing on personal belongings that are worth less than £6,000, or if you give assets to a registered charity.

Nor do you have to think about CGT when selling your private car and your main home, or when you receive money from Isas, Premium Bonds, betting, lottery or pools winnings, or personal injury compensation.

How to get out of paying CGT

Believe it or not, there are ways to avoid paying CGT that will not attract the ire of the taxman, though most of these techniques merely defer CGT to a later date or transfer it to another person.

One popular method is to transfer your assets to your spouse or civil partner. As long as you are legally married and living together there is no CGT to pay at that point. However, this transfers the legal ownership and CGT will have to be paid if and when he or she sells the assets.

You can also escape CGT in the short term by reinvesting your gains under the Enterprise Investment Scheme. 

You need to make sure that you meet the qualifying conditions.

You can also reduce the amount of CGT payable on some assets by offsetting a loss. For example, if you make a loss when disposing of one asset that would attract CGT, you may be able to deduct this loss from capital gains that you have made on other assets.

Recent changes

In April 2008 the Government abolished taper relief, which had
previously allowed some taxpayers to reduce their CGT bill by up to 40 per cent. Instead, a flat rate of 18 per cent now applies. At the time, owners of small businesses protested against the changes, which effectively increase the amount of tax that they have to pay because they are now no longer able to receive taper relief.

The Chancellor announced a partial climbdown when he unveiled plans for entrepreneurs' relief. 

Business owners with a stake of more than 5 per cent in the company they work for will pay only 10 per cent tax on gains up to £1 million.

Calculating your CGT liability

First add up all the gains you have made from the sale of assets during the tax year, from April 6 one year to 5 April the next year.

The tax applies on the gain, not on the amount you sell it for. For example, if you bought shares for £500 and sold them for £2,000, you have made a gain of £1,500.

Then subtract costs, as well as any losses made on the disposal of other assets. You may also subtract the annual exempt amount, currently £10,100 for every individual.

You pay 18 per cent on anything left.

CGT when you give something away

You may have to pay CGT when you give something away, even if you do not receive any money for it or receive less than it is worth, if the asset has increased in value since you bought it.

Say you bought a flat for £75,000 and allowed a relative to use it.

You later decide to sign the flat, now worth £100,000, over to the relative. You have made a capital gain of £25,000 and must pay CGT on that amount. It does not matter whether you receive any money for the flat from the relative.

Paying the taxman

If you do not usually complete a tax return but wish to report a gain or loss, contact your local tax office and ask for a self-assesment tax return, including the relevant pages for CGT.

If you already receive a self-assessment tax return, it will tell you if you need to request and fill in the CGT pages.

You need to tell your local tax office in writing by the October 5 deadline if you have gains or losses to report from the previous tax year.

CGT on an inheritance

You do not have to pay CGT if you inherit something. However, if you later sell or give away the asset, you will have to pay CGT. 

For example, if a relative's will leaves you £6,000 of shares, you do not have to pay any CGT, but if you sell them later for £9,000, you may have to pay CGT on the gain of £3,000.