Debitoor's accounting dictionary
Capital Gains Tax

Capital Gains Tax – What is Capital Gains Tax?

Capital Gains Tax is the tax you must pay when you sell or pass on a private asset that has increased in value.

Capital Gains Tax is one of the many taxes you need to be aware of if run your own business. Find out more about taxes for freelancers and entrepreneurs.

If you make a purchase then 'dispose of' this item for more than its original value, you will be liable to pay tax on the gains – that is, the profit you make from selling the asset, rather that its total value.

You can calculate gains by subtracting the price you paid for the asset from the price you sold it on for. For example, you buy a car for £10,000 then sell it for £15,000 – the gain is £5,000, so that £5,000 is taxable.

Bear in mind that ‘disposing of’ your asset isn’t just selling. Giving your asset to someone else, swapping it, or getting compensation for it (such claiming insurance if the asset is lost or damaged) all counts as ‘disposal’, and you will be liable for Capital Gains Tax under any of these circumstances.

Which assets can be taxed?

‘Chargeable assets’ are those assets which are liable for Capital Gains Tax. In the UK, chargeable assets include:

  • Most personal possessions worth over £6,000. This may include jewellery, antiques, artwork, or collectibles, but usually doesn’t include cars.
  • Any additional property that isn’t your main, or only, home.
  • Shares or bonds that aren’t in an Individual Savings Account (ISA) or Personal Equity Plan (PEP).
  • Any business assets, including vehicles, land and property, machinery, and registered trade marks.

Your home is usually exempt from Capital Gains Tax, but there are some exceptions. You may need to pay Capital Gains Tax on your main property if you rent it out, use it for business, or if it’s particularly big (i.e. over 5,000 square meters).

Which assets are not taxed?

You only pay Capital Gains Tax on gains that exceed £12,000. If your total annual gains fall under this threshold, you won’t have to pay any Capital Gains Tax, regardless of which assets you have disposed of.

Usually, gifts to charities, your spouse, or civil partner are tax-free, as well as anything with a ‘limited lifespan’, such as clocks, watches, or machinery.

For businesses, only self-employed sole traders and partnerships pay Capital Gains Tax. Limited companies and other kinds of organisations are liable for Corportation Tax instead.

How do I pay Capital Gains Tax?

In the UK, there are two ways to pay Capital Gains Tax: straight away through HMRC’s ‘real time’ Capital Gains Tax service and through the annual Self Assessment tax return.

Whichever method you use, you’ll need to make sure that you have the details of:

  • Each gain or loss that you plan on reporting
  • Records of your costs
  • Any reliefs that you’re entitled to.

Reporting Capital Gains Tax straight away

You can report and pay Capital Gains Tax online as soon as you dispose of an asset. To do this, you’ll need a Government Gateway ID. You will also need to have PDF or JPEG files to document your capital gains.

If you choose to pay your Capital Gains Tax this way, you do not need to wait until the next tax year to pay the tax you owe. However, you must report gains by December 31st in the tax year that the assets are disposed of.

Reporting Capital Gains Tax through Self Assessment

Alternatively, you can report your gains through the Self Assessment tax return. This lets you report – and pay tax on – the gain in the tax year after you dispose of a chargeable asset.

You should send the Self Assessment tax return by January 31st (if you submit it online) or October 31st (if you submit your return manually via paper forms). Once you have sent your Self Assessment to HMRC, they will calculate how much you owe.

Capital Gains Tax in Australia

Capital Gains Tax was introduced in Australia in September 1985. Any chargeable assets acquired since the introduction of Capital Gains Tax are taxable. All assets are considered chargeable unless they are assets for personal use (such as your house or furniture) or assets that depreciate and are used exclusively for business purposes (such as PP&E).

Unlike in the UK, Australian Capital Gains Tax is not considered a separate tax, but part of someone’s Income Tax. Gains and losses are therefore reported as part of an Income Tax return.

In Australia, a capital gain or loss should be reported when the transaction is agreed, regardless of when payment is made. For example, you sign a contract to pass on an asset in May 2019, but you do not receive the money until August 2019. The capital gain should therefore be reported in your 2018-2019 tax return.

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