Brief Guide to Capital Gains Tax

Exemptions

The following are exempt from CGT: sale of your car and gilts, winnings from Premium Bonds and the Lottery, gains made within PEPs and ISAs, and the sale of your home (what the Inland Revenue calls your ‘principal private residence’).

Gifts

You won’t have to pay CGT if you give away an asset to your spouse or a registered charity. It is useful to pass on an asset to a spouse to sell if you have already made full use of your annual allowance.

You will have to pay CGT on items given to anyone else, including your children. The ‘profit’ is calculated as the difference between what you paid for the asset and what it is currently worth. For example, if you give your offspring a flat that you bought for £50,000 and is now worth twice as much, you have technically made a profit of £50,000. Subtract your annual allowance of £8,200 and you will have to pay CGT on £41,800 (less any costs).

This theoretical profit also applies if you inherit or are given an asset and then sell it for more than it was judged to be worth when you became the owner.

Relief

Before April 1988, extremely complicated indexation rules gave you tax relief on gains that were purely a result of inflation. These regulations were changed to come under the name of taper relief, which is almost as complex as indexation but is basically charged at different rates to discourage speculators and reward long-term investors and owners of small businesses.

The Inland Revenue’s website (http://www.hmrc.gov.uk) offers much more information of taper relief and a table to work out what you are due to pay. A good understanding of the subject will help avoid unwittingly giving the taxman more than you owe him. If you are unsure, hire an accountant or ask the Inland Revenue to make your calculations for you.

Losses

You can offset your losses against profits, and you can use the losses of any year. (No time limit applies). But you must first use up losses from the current year, and you cannot offset losses from assets that don’t attract CGT.

For individual taxpayers, losses do not reduce net gains below £8,200, so that the annual exemption is not wasted.