Capital Gains Tax explained
Many people think that capital gains tax is only a concern for the rich and famous. However, this misconception couldn’t be further from the truth. Capital gains taxes can impact you whether you’re an investor, small business owner, or even an employee who received stocks as part of their compensation package. In this article we’ll go over what capital gains are and how they’re calculated so that you can understand how your investments will affect your income taxes!
Capital gains are profits from the sale of a non-inventory asset.
Capital gains tax is not the same as income tax. Income tax is a percentage of your total income earned in a year, whereas capital gains tax only applies to profits you make from selling an asset.
Capital gains taxes are calculated using a formula that includes:
● The sale price of the asset (the amount you sell it for)
● The purchase price of the asset (the amount you bought it for)
Non-inventory assets include personal assets like investment property, vehicles, homes, and collectibles.
If you own investment property, vehicles, homes or collectibles that aren’t inventory items (i.e., stocks and bonds), they would be considered non-inventory assets. These are all personal assets and not included in the capital gains calculation.
Capital gains tax allowance
When considering your tax return, you’ll be pleased to know that there is a capital gains tax allowance. How much is the capital gains allowance? Well, it’s currently set at £12,300 for individuals, meaning that you can make £12,300 of profit on your assets before the applicable rates kick in.
Should you have joint ownership of a taxable asset such as a second home, the allowance doubles to £24,600. For those who are married or in a civil partnership, assets can be exchanged between you.
However, be aware that if you do transfer assets to a partner and make a gain from this later, the CGT that you pay will be based on the total time that you owned the asset(s) together, rather than the date of transference.
So, if you’re wondering how much capital gains tax you pay on property or when you sell a house, it’s zero on your main residence and, depending on your bracket, either 18% or 28%.
How much capital gains tax on stock and shares depends again on your bracket, but any gains will be taxed at either 10% or 20%.
How to calculate capital gains tax
Well, you do it manually with a pen, paper and calculator. However, if you have many taxable assets this may take some time.
Alternatively, the government has published a Capital Gains Tax Calculator on the GOV.UK website. This page also lists out some of the deductions, reliefs and special circumstances that might be available, which we also cover below.
The world of fiscal contributions is vastly complicated; getting it wrong can result in headaches, interest and fines. But getting it right can be financially rewarding.
A financial adviser will be able to analyse your income and outgoings and consider any tax overlaps between CGT, stamp duty, VAT, inheritance and income tax, to guide you through your tax return.
When do you pay capital gains tax?
Anytime you sell a taxable asset and receive more for it than you paid, CGT will apply (there are a few exceptions such as non-business use cars). CGT on second homes (or non-primary residential property) must be declared within 60 days of the sale and any gain being made.
If you’re including CGT within your annual tax return, the official deadline for tax returns is 31st January. However, the deadline has been extended for this year, meaning you won’t receive a fine if you submit your return before 28th February 2022.
The exception to this is the sale of residential property – this should be reported to the government within 60 days.
If you’re using the HMRC real-time capital gains tax service to pay, then this should be submitted by 31st December in the year after your gains have been made.
You must also pay CGT on any cryptocurrency gains that are realised. That is, if you use your gains to buy more cryptocurrency, or you withdraw/convert it to pound sterling, CGT will apply.
This is a very important concept to understand because it affects your finances and potential returns on investments. I hope this article has answered some of your questions about capital gains tax, but if you have any others, please feel free to leave them in the comments below! If you have any further questions then please do get in touch with Makinson & Co.