Capital Gains Tax (CGT) is a tax charged on the profit or gain you make when you sell or '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
- exchange it for something else
- receive compensation for it - e.g. you receive an insurance payout when an asset's been destroyed
It's the gain you make - not the amount of money you receive for the asset - that's taxed.
Most assets are liable to CGT when you sell or dispose of them. This includes shares, property, business assets and personal possessions - whether they're in the UK or overseas. But some assets are exempt.
Some assets aren't liable to CGT at all because they're exempt. These include:
- your car
- personal possessions worth up to £6,000 each, such as jewellery, paintings or antiques
- stocks and shares you hold in tax-free investment savings accounts, such as ISAs and PEPs
- UK government or 'gilt-edged' securities e.g. National Savings Certificates, Premium Bonds and loan stock issued by the Treasury
- betting, lottery or pools winnings
- personal injury compensation
- any foreign currency held for your own or your family's personal use outside the UK (e.g. if you've made a gain because of a change to the exchange rate)
The annual tax-free allowance
You have an annual tax-free allowance for CGT known as the 'Annual Exempt Amount' (AEA). The AEA for tax year 2013-14 is:
- £10,900 for each individual
- £5,450 for most trustees
If your overall gains for the tax year are above the AEA, you'll pay CGT on the excess.
If your overall gains are below the AEA, you won't pay CGT.
What is the rate of capital gains tax?
There are two rates of CGT which apply to sole traders: 18% and 28%. The rate you will have to pay will depend on your total taxable income. You can read more about CGT calculations on the HMRC website.
Note that for trustees and personal representatives of deceased persons, CGT is a flat rate of 28%.