What is capital gains tax?

Capital gains tax

What is capital gains tax?

By Ian Robinson

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What is capital gains tax?

Capital gains tax (CGT) is a tax on the increase in value of possessions – such as a second home, antiques or shares – during the time you have owned them.

 

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Video transcript

Capital gains tax has to be paid on items which are sold at a substantial profit. Antiques, shares, precious metals and second homes could all be subject to the tax if you make enough money from them. But working out exactly how much tax you need to pay, can sometimes be tricky. Capital gains tax only needs to be paid if you make a certain amount of profit from the sale of your possessions in any given tax year.

The amount of tax for your profit you can make in each year is set by the government. You only pay tax when the amount you exceed this figure by. In most cases, your profit equals the amount you sold an item for minus the amount you paid for it. For example, if you sold two holiday homes at a combined profit of 20,000 during the 2013-14 tax year, you would only have to pay tax on the excess of 9,100?

The rate of capital gains tax you pay on that figure will depend on your overall earnings. In 2013/14, basic rate tax payers would owe 18% of this amount, whilst higher rate taxpayers would be charged 28%. But what if you sold a rental property at a loss of 200,000 that year? Well, you can offset that against your annual gains.

I mean there's even less money you need to pay tax on and there's more. Suppose you've made losses on anything you sold in previous years. Maybe you're an entrepreneur or a personal representative to somebody who's died. How much tax would you pay then? Find out more in our detailed capital gains tax guide on which.co.uk.

Any tax is due when you dispose of them, usually by selling them or giving them away.

You are allowed to make substantial gains each year before you start to become liable for tax, and some gains are tax-free. We explain these in capital gains tax allowances and rates.

  • Last updated: April 2016
  • Updated by: Ian Robinson