What is capital gains tax?
Capital gains tax is a tax on the profit an investor makes from the sale of an investment or asset if the taxable gains are more than your annual CGT Allowance. The government does not tax the amount you sold it for but only the gain, so if you sell an asset or position at the same price that you bought it for or at a loss, you do not pay capital gains tax.
How is it calculated on investments in the financial market?
The first step is determining your basis, defined as the amount you paid for the investment plus any fees or commissions you paid at the time. Next, you need to determine your realised amount, which is the sale price minus all fees and commissions paid when selling the investment.
Subtract the basis from the realised amount. By doing so, you will have one of two outcomes: capital gains, where you make a profit, or a capital loss.
If you have capital gains, the next step is determining how much tax is paid, and this depends on whether you are paying a basic tax rate or a higher tax rate. If you pay a basic rate, it will be 10%, and 20% if you are in the higher or additional rate tax band. Your CGT liability also depends on how long you have held the asset for and whether it is property or not.
What types of investments are subject to GGT in the financial market?
Everything is subject to CGT, apart from investments held in ISAs and pensions.
What is the annual CGT allowance for investments and how does it affect your taxes?
You only have to pay capital gains tax if the gains exceed the tax-free allowance. This allowance is also called the Annual Exempt amount and is £6,000, or £3,000 if you have invested in and made capital gains on trusts.
You will not receive a bill through the post for any capital gains made on investments, so it is important to keep track. Capital gains on investments that are above the allowance should be reported on a Self-Assessment tax return filed annually to HMRC. Gains made should be reported in the tax they are they applicable to, i.e. after the tax year that ends April 5th.
There is also a ‘real time’ Capital Gains Tax Service, where gains can be reported.
What are the CGT implications of selling shares in the financial market?
The main implication is a reduction in your profits. The tax will reduce the amount you end up with once you have paid it after selling an asset in the financial market.
What is the deadline for paying CGT on investments in the financial market?
The deadline is 60 days for the sale of a residential property and January 31st after the end of the tax year.
What are the exceptions?
Yes, there are exceptions, including if you have shares in an ISA, have invested in Qualifying Corporate Bonds and Premium Bonds, or sell employer shareholder shares. Gilts issued by the government and primary residences are also exempt.
Capital gains must always be reported if the gain is not exempt. You can do this via your Self-Assessment return or by using the government CGT Capital Gains Tax Service. If you have any concerns about your capital gains tax liability, speak to a qualified tax accountant for advice.
Remember that your capital gains tax liability also depends on the taxation bracket to which you already belong.