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Capital Gains Tax Fact Sheet

Introduction

Anyone who goes out for regular country walks is bound to have come across anglers, usually clustered round a pond or a lake. They put up their tents, hang out fishing rods, then sit patiently through the night with their thermos flasks, waiting for the big one to bite.

One of the most sought-after freshwater fish, both because of their potential size and also because of the difficulties involved in catching them, are carp. Few anglers ever see them them, but everyone “knows” they are there.

Capital gains tax (CGT) is a bit like that. We all know it is there, but fondly imagine that – being a tax on the “rich” and their share-based assets – it need not affect us in any material way.

Making that assumption would be a mistake. Like a giant carp, CGT may lurk out of our sight most of the time. Yet it has the potential to affect anyone who runs a small business and needs to sell or wind up their company as they reach retirement.

Moreover, hundreds of thousands of buy-to-let investors who bought second properties in the last few years look set to discover that CGT has the potential to grab thousands of pounds out of any potential profits to be made when selling up.

What is CGT?

Some aspects of CGT are tremendously complicated.

Put simply, you pay CGT on any profits you make on your investments over an annual capital gains allowance, set at £9,600 for 2008-2009.

Many people believe that CGT is set at 40 per cent, like inheritance tax. In fact, those gains are added to your income to determine the rate of tax you'll pay.

Following the abolition of the ten per cent CGT rate, all individuals are liable to pay CGT on capital gains above the £9,600 threshold at 18 per cent.


How CGT is applied

The amount of CGT you pay depends on how long you have held that asset.

For any asset bought after 5 April 1998, a process called “taper relief” applies. This means that the longer you hold an asset for, the less tax you pay on any gains you have made.

How it works

There are two rates of taper relief: one for business assets, the other for non-business assets. The tax regime for business assets is by far the more favourable of the two and means that if you hold an asset for more than two years you only pay tax on 25 per cent of the gains.

Indexation allowance

If you owned the asset on or before 5 April 1998 you can reduce the taxable gain by claiming indexation allowance. This strips out the effect of inflation over the years since you bought the asset.

The issue of indexation is very complicated. Possibly the best explanation is available on the HM Revenue & Customs website.


More pages

Page 1: Introduction
Page 2: Non-business assets held after 6 April 1998

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