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The Basics of Capital Gains

A Selection of Common Questions and Answers around Capital Gains

What are Capital Gains and what are Capital Gains Taxes applied to?

Capital gains are the profits gained on the sale of an asset when it has accrued value during the time that it was owned.

Capital Gains Taxes are the taxes levied on these profits for individuals.

The taxes are deducted from the profit made from assets which are sold, gifted, or disposed of in any way. This can include transferring assets, swapping assets, and even getting compensation for damaged assets from insurance companies. Things considered to be relevant for capital gains taxes consideration by HMRC include any physical possessions over the value of £6,000, like property, or cars as well as intangible assets such as shares.

Recently HMRC also recognised cryptocurrency as an asset on which capital gains taxes can be applied when profits are made on their trading. Platforms used to trade cryptocurrencies have now become regulated, giving the government access to your crypto trading portfolio, making it as important as ever to calculate and report your earnings on these accurately.

Is capital gains tax applied at similar rates to income tax?

With capital gains tax you are entitled to make more and to be charged less than your regular income. And as capital gains tax does not include mandatory additional national insurance payments unlike income taxes, the difference is increased even further.

Although there are many advantages to capital gains taxation over those of income tax, the rules are vastly different, which could lead to confusion when completing your tax returns.

What are some of the factors that affect capital gains tax calculations?

As an individual you do not need to pay capital gains unless you’ve made more than £12,300 in profit within one tax year. Anything less can be used against your tax-free allowance.

If the tax bill is under your personal allowance, yet you have further losses to report, you can also claim these against your taxes for the next four years (with some exceptions).

A few factors which should be considered when calculating the capital gains tax an individual may or may not have to pay on profit above the tax free allowance include:

  • Considering if your first home was used in a business transaction such as letting.

  • The size of your home is more significant than the average.

  • A property being a second home rather than your primary residence.

  • If shares are ISA or PEP shares or another kind.

  • Gift made to a spouse, civil partner or business partner.

  • Gifting your primary residence property to family or others.

There are many ways in which each of the above factors should be carefully considered in order to calculate capital gains wisely.

Do companies pay capital gains taxes?

Capital Gains Taxes are purely for individuals, however limited companies do pay taxes on their capital gains in the form of corporation tax.

Businesses can also make savings on the taxes due on their capital gains when they are careful about the factors that affect the calculation of their taxes due. For example, allowable losses can be claimed.

If you own a business, it is vital that you keep records of your receipts and invoices for any deductible costs you had for five years as they can be asked for by HMRC. You must also keep records of compensation for damages, stamp duty you have paid and payment to establish market value.

And it may be useful to know that in some cases, gifts of transference of assets to business partners will not be subject to capital gains tax.

We understand how overwhelming all these conditions can be. At EDA, we can help you use capital gains to your advantage.

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