Capital gains tax is a tax on possessions, or more specifically the increase in value of your possessions. This can apply to shares, property or antiques. The tax comes into action at the moment that you dispose of them – whether that’s by selling, or in certain cases, giving them away as a gift.
For the tax year 2010-11, everyone gets a capital gains tax allowance up to the value of £10,100. This simply means that if you sell or give away possessions equal to this amount or less, then you don’t have to pay any tax on it. It’s when you dispose of items above this value that capital gains tax is due. But, do keep in mind that some items are exempt from capital gains (such as, if you only have one house and are selling it).
Prior to June 22 2010, capital gains tax was charged at a single rate of 18 per cent. After this point, there became two different tax rates: 18 per cent and 28 per cent, depending on what income tax bracket you fall within. In other words, the amount of tax due depended on your earnings.
Basic rate taxpayers (currently those earning up to £37,400, but will come down to £35,000 from April 6) pay 18 per cent, while higher rate taxpayers (earning above the basic rate threshold) pay it at 28 per cent.
Be aware, if your earnings from capital gains pushes your income level above the basic rate threshold, then it takes you into the higher tax bracket leaving you with 28 per cent capital gains tax.
As with other types of tax-free allowance, it’s only the profits above £10,100 which are taxable.
What capital gains are exempt?
There are a number of capital gains which are exempt from tax:
Home: sale of your only, or main, home.
Money: lottery winnings and gambling successes; various savings plans (such as ISAs, pension contributions and child trust funds etc); shares held in approved share incentive plans.
Special gifts: gifts to charities and gifts between husband and wife (or registered civil partners).
Gift or sale: private cars; antiques (not worth more than £6,000) – they are often referred to as ‘chattels’. Also, items with a predicted life of less than 50 years, such as boats and antique cars, known as ‘wasting assets.’
The HMRC website gives the following advice for working out your capital gains tax:
1. First work out your taxable income by deducting any tax-free allowances and reliefs that you are entitled to.
2. Next see how much of your basic rate band is already being used against your taxable income. The maximum basic rate band for 2010-11 is £37,400.
3. Allocate any remaining basic rate band first against gains that qualify for Entrepreneurs’ Relief – these are charged at 10 per cent.
4. Next allocate any remaining basic rate band against your other gains, these are charged at 18 per cent.
5. Any remaining gains above the basic rate band are charged at 28 per cent.
The good news is that capital gains tax is set to stay the same for the new tax year. The £10,100 tax allowance is an underrated perk which any freelancer with disposable possessions would do well to keep in mind.
Photo by Andrew Michaels – CC
