Capital gains tax for additional rate payer

Capital gains accountant, Advisers for additional rate taxpayers

Capital gains tax is the tax payable when you sell your heirloom, shares, business, second property or any other asset. The amount of tax payable is determined by the tax bracket you are in and the tax-free allowance rate for the given year. This guide provides more information on how capital gains tax works.

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What is capital gains tax?

Capital gains tax refers to the amount payable on any profits made upon the disposal of an asset whose value has gone up. The taxable amount will typically be dependent on the value of the asset and the income.

What is a disposal?
Disposal of an asset may involve:
1. Selling the asset
2. Getting compensation for an asset that has either been destroyed or lost 3. Swapping the asset for another asset
4. Transferring or gifting an asset to another party

What do you pay capital gains tax on?
1. Most personal possessions excluding your car that are equal or more than £6000 in value 2. Business assets such as machinery, plants, buildings, and land
3. Property that is not your main residence
4. Your main residence if it is used for business or let out
5. Shares
These are typically referred to as chargeable assets.

You do not pay capital gains tax on:
1. Any shares in an ISA
2. Lottery or betting winnings
UK government premium bonds or gilts

Tax allowances
Only profits above the annual tax-free allowance of £11, will be liable to capital gains tax. The annual tax- free allowance is often referred to as the Annual Exempt Amount. Depending on the type of asset that has appreciated, you may claim tax relief in instances such as:
1. Replacement of business assets/Roll over relief – Wasting assets defined as assets that last for less than five decades are usually exempted from capital gains tax.
2. Private residence relief
3. Entrepreneur’s relief – You can pay less capital gains tax if you are disposing of part or all of your business

Tax on gifts
Civil partner/Spouse
Capital gains tax is not payable on any assets you sell or gift to your civil partner wife or husband unless you: 1. Gave them the assets for them to sell on in the course of doing business
2. Separated or never lived together in the course of the tax year
Your civil partner/spouse will have an obligation to pay capital gains tax if they decide to transfer or sell the asset

Charity
Any assets you give to charity are not subject to capital gains tax

How much tax do you need to pay?
Your annual capital gains tax allowance is what determines how much capital gains tax you have to pay. You will pay capital gains tax on any profits above your annual allowance. The amount payable is calculated thus:
1. Calculate total taxable amounts on profits
2. Work out the profits for each asset that was disposed of during the tax years. The gain is typically the amount above what you paid for the asset and what the buyer paid for it when you disposed or sold it on.
3. Compute the profits from each asset
The totals will be the capital gains tax payable

Deduct any allowable losses
If you realize a loss when disposing of an asset, you can reduce your capital gains tax payable by reporting the loss to the HMRC. The total amount of loss is deducted from any profits you may have made in the tax year.

If you deduct all your allowable losses and still find that your capital gains tax is above the tax-free allowance for the year, you can still get relief by deducting unused losses from past years. Once you have enough losses from previous years to get you into the tax-free allowance bracket, you can carry forward any remaining losses to use for relief in future years.

You do not have any tax obligations if you capital gains tax are below your allowable tax allowance for the year. Nonetheless, you are obligated to inform the HMRC if:

1. You sold or transferred chargeable assets that are worth more than four times the tax allowance (£46,800) for the 2018-2019 tax period.
2. You got losses that you need relief from
You can include this in your tax returns

Apply the tax rate
Capital gains tax for basic income taxpayers is pegged at 10% and 20% for those on the higher tiers of income. Any capital gains realized on the disposal of a buy to let investment or a second home, basic rate taxpayers will need to pay 18% in capital gains tax while higher tier taxpayers will have to pay 28%.

How can you report and pay capital gains tax?
You can pay and report your capital gains tax if you are a UK resident on the real-time Capital Gains Tax service on GOV.UK

Example
Kate purchased an apartment for £200,000 and then sold it for £250,000 making a £50,000 profit
The direct costs incurred in selling and buying the asset can be deducted when we calculate how much she needs to pay in capital gains tax:

£50,000 – £3,000 (advertising fees, estate agent fees among other selling costs) – £3,000 (stamp duty, survey fees and other buying costs) = £44,000 (chargeable gain/the net gain) – £11,700 (tax allowance) = £32,300 (Capital Gains Tax).

Let us assume that the apartment was a buy to let – an investment property. We need to calculate her capital gains tax by taking the appropriate tax rate and multiplying it by the taxable gain: The appropriate rate may either be 28% or 18% or a combination of the two. The applicable rate will depend on how much income

Kate has:

Higher tier taxpayer: If her income is greater than £46,350 (the tax bracket is £46,351 to £150,000) in the tax year 2018 to 2019, she will be classified on the higher band. This means that the applicable capital gains tax will be at 28%. This works out to 28% of £32,300 which is £9,044.

Basic Taxpayer: If Kate makes less than £46,350 a year (the tax bracket is £11,850 to £46,350) she will be classified as a basic rate taxpayer. The basic rate taxpayer pays taxes at 18%. As such, if she has an income of say £30,000 she will be in the basic band for the first £16,350 and at 28% for the rest of her income that falls in the higher tier band:

18% x £16,350 = £2,943+ 28% x £15,950 = £4,466 Total tax = £7,636

If she reports income less than £11,700 (her personal allowance) or no income at all for the tax year, the capital gains tax will be charged under the basic rate band at 18%. This will be
£32,300 x 18% = £5,814

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