Capital Gains Tax is a tax on the profit or gain you make when you sell or otherwise ‘dispose of’ an asset.
You usually dispose of an asset when you cease to own it - for example if you sell it, give it away as a gift, transfer it to someone else or exchange it for something else.
For example if you make a gift of a second home to your children, you'll have to work out if there's any Capital Gains Tax to pay on the disposal of the property at that time.
In some cases you're treated as if you've disposed of an asset. For example a building has been destroyed and you've received a capital sum, such as an insurance payout, by way of compensation.
It's the gain you make - not the amount of money you receive for the asset - that's taxed.
When you sell or otherwise dispose of property - such as a building, land or lease - you'll usually have to work out if there's any Capital Gains Tax to pay.
However, if you sell your main home you're usually entitled to Private Residence Relief, a tax relief that covers any gain made and means there's no tax to pay (see 'Selling your own home' further below).
Typical types of property include:
· a property that you've bought as an investment, for example a buy-to-let property
· a second home, for example a holiday home in the UK or overseas
· business premises, such as a shop or a factory
· land, such as agricultural land
There are some special rules for working out certain gains and losses on land
To work out your Capital Gains Tax you'll need to look separately at each asset disposed of that's liable to Capital Gains Tax and in straightforward cases:
1. Take the disposal proceeds (usually the amount received) and deduct your costs and tax reliefs to work out each gain or loss.
2. Add together all of your gains for that tax year.
3. Add together all of the losses you've made for that tax year.
4. Deduct any allowable losses you've made that year from the gains to work out the overall gain or loss.
5. If the overall gain is below the annual tax-free allowance (known as the ‘Annual Exempt Amount’), there's no Capital Gains Tax to pay. The Annual Exempt Amount for individuals is £10,100 for 2009-10 and 2010-11.
6. If the overall gain is above the Annual Exempt Amount, you may be able to deduct unused losses from earlier years.
7. If the overall gain is still above the Annual Exempt Amount, you deduct the Annual Exempt Amount and work out the tax on the balance. The rate of tax is 18 per cent for 2009-10. Follow the 'Capital Gains Tax rates' link below to find the rates of tax for other years
If you've made a loss on a disposal you'll need to claim it in order to set it off against your gains
You don't have to pay Capital Gains Tax when you sell or dispose of your own home, as long as you're entitled to full Private Residence Relief.
You must have used the property as your only or main residence throughout the time you've owned it. Certain other conditions must also be met.
If you sell, give or otherwise dispose of a property to your husband, wife or civil partner you don’t pay Capital Gains Tax as long as you've lived together for at least part of the tax year in which you made the disposal.
However, if your husband, wife or civil partner later sells or disposes of the property, they’ll have to work out the tax due. It's useful to keep a note of what the asset cost you, as your spouse or civil partner may need this to work out their Capital Gains Tax when they dispose of the asset.
If you sell, give or otherwise dispose of a property (that's not your main home) to any other family member - or to a spouse or civil partner that you haven't lived with during that tax year - you'll have to work out the gain or loss made and any Capital Gains Tax due.
If you give away your home, for example to a child, you don't have to pay Capital Gains Tax as long as you're entitled to full Private Residence Relief but your child may have to pay Capital Gains Tax when they sell or dispose of it.
If you're a sole trader or a partner in a partnership and your trade is in property, you'll pay Income Tax rather than Capital Gains Tax on any profits you make when you sell or otherwise dispose of property. This may include a one-off purchase and sale of a property. You usually have to pay any Income Tax due by completing a Self Assessment tax return.
It's different if the property trading business is carried on by a limited company - in which you may be a director or shareholder - any profits on properties disposed of form part of the total profits of the company on which it pays Corporation Tax.
In many cases you work out the gain or loss when you dispose of land in the same way as for other assets. But there are some special rules for working out gains and losses if you:
· dispose of land that's been compulsorily purchased
· grant a lease
· assign or surrender a lease