What is Capital Gains Tax?

What is Capital Gains Tax?

Capital gains tax, as its name suggests, is a tax on any capital gains an individual or company makes on “non-inventory assets.”

What is a capital gain? Typically, it refers to profits made on stocks, property, bonds, and precious metals, although there are many other things that could be subject to capital gains tax. If an individual or company has an asset that creates a liability for capital gains tax, they will usually work with an accountant to help them manage their tax affairs.

Capital Gains Tax in the United Kingdom

Not every country (or states within countries, such as in the United States) charges capital gains tax. In the United Kingdom, the rate of capital gains tax is 18% for those paying the basic tax rate. This was a flat rate until June 2010, when it was raised to 28% for those paying above the basic tax rate as part of the post-election emergency budget. Interestingly, the Labour Party had pledged to raise this to 40% had they been re-elected.

Capital gains tax liabilities are declared when individuals complete their self-assessment tax return.

Capital Gains Tax Allowances

As with other taxes, income tax and corporation tax being the two most people will be familiar with, each individual or company has a capital gains tax allowance. This is the amount of profit, or capital gains, one can make before being liable for tax. This limit will be £11,100 for the tax year starting April 6th, 2014, an increase of £100 on the previous year.

Capital Gains Tax Exceptions

There are a number of capital gains tax exceptions and exemptions in place in the UK. Principal private homes and cash held in ISAs are the most common examples. There is also a system in place called “Entrepreneur’s Relief,” so that entrepreneurs only pay 10% capital gains tax. To benefit from Entrepreneur’s Relief, an individual has to hold over 5% of the shares of a company, and been involved with the business for at least one year.

Capital Gains Tax Elsewhere

Capital gains tax is often used to great individual benefit in other countries, such as the United States, where this rate is lower than the income tax rate. This situation means individuals who have invested in assets are in a great position to increase their income. However, it also means those who don’t have assets can find themselves locked in a tough to get out of system of relatively high tax, therefore little opportunity to save and invest. This can lead to an increasing wealth gap.