There's nothing better than making a significant profit on an asset that you have sold. Whether you're selling artwork or property, it's so satisfying to see a good return on your investment.
Evolving markets or high buyer demand can mean that your assets fluctuate in price and you're able to sell the items for more than you bought them for.
Despite the benefits of making gains on your assets, however, if you gain over a certain amount, you will need to pay tax on it.
In this article, we'll walk you through the process of Capital Gains Tax and how much you need to pay if the disposal of your assets meets certain criteria.
When you sell an item and you make a profit on it, then you will need to pay tax on the profit. This tax is called Capital Gains. You will be taxed solely on the profit you made on the asset, rather than the wholesale cost. For example, you may have bought artwork for £5,000, but you eventually sell it for £6,000. The Capital Gains Tax due on this sale would be applied to the £1,000 profit you made.
This form of tax is only applicable when you 'dispose of an asset'. Disposal is counted as selling an item, giving it away as a gift, swapping it for another item or receiving compensation for it should the item be lost or destroyed. The asset has to have increased in value between the time you bought it and when it left your possession.
Continue reading to find out how much tax you need to pay, as well as circumstances that mean you are exempt from paying the tax.
What is the current Capital Gains Tax rate?
Capital Gains Tax rates depend on how much tax you pay on your income and whether it is a basic or higher rate. You will also pay a different tax rate on profits made from residential properties than you would on other types of assets, although you won't usually have to pay this kind of tax when you sell your home.
If you pay a higher or additional rate as a taxpayer, you will be required to pay 28% of your profit (otherwise known as 'gains') on a residential property. 20% of Capital Gains Tax will be due on other chargeable assets. As a basic rate taxpayer, the tax will be dependant on the size of the gain, as well as how much you pay on your taxable income and if the gain is from selling a residential property or other types of chargeable assets.
To work out how much tax you need to pay, first work out how much income you have after you've taken off Personal Allowance and other kinds of income tax relief. You then need to calculate the total gains you have made through disposing of your assets and then minus the tax-free allowance from this amount. After adding this amount to your total taxable income, you should be able to see which Income tax band you fall into.
Those that fall into the basic Income Tax band will need to pay a Capital Gains Tax rate of 18% on residential properties and 10% on other disposable assets. If you fall into a higher tax band, you will need to pay 28% on residential properties and 20% on other kinds of gains.
Income Tax bands
The standard Personal Allowance is £12,570 - you don't have to pay tax on income up to this threshold. For income that falls between £12,571 to £50,270, you will need to pay 20% in tax for the basic rate. Earning an income between £50,271 to £150,000 places you in the higher rate band and means that you have to pay 40% in tax. The additional rate is applied to incomes above £150,000 and has a 45% tax rate.
What do I need to pay Capital Gains Tax on?
Capital Gains Tax is due on personal items that are sold for £6,000 or more (excluding the sale of your car). You would also need to pay the tax on gains made from selling a property, although this tax is excluded from house sales if it was your only property and main address. Shares that are not based in an ISA (Individual Savings Account) or PEP (Personal Equity Plan) are also chargeable assets that you need to pay tax on. Depending on the type of asset you make gains on, you may be eligible to claim for tax relief.
You will only need to Capital Gains Tax on your portion of profit if the asset was co-owned with someone else.
Some business assets may mean you require you to pay Capital Gains Tax if you made a gain on the sale of all or part of it. You may need to pay tax on items such as land, buildings and machinery. Shares, trademarks, fixtures and fittings are also eligible for Capital Gains Tax if you make a profit on their disposal.
Sole traders, partnerships and those that are self-employed are the only kinds of businesses that pay Capital Gains Tax. Limited companies, however, pay Corporation Tax on their profits instead.
Costs can be deducted from the profit if they cover fees such as advertising or improvement of the asset (aside from normal repairs). Stamp Duty and VAT costs can also be deducted from the gains of the business asset, as long as you aren't already claiming a VAT return. You cannot claim deductions if you have previously classed the asset as a business expense.
There are some instances where you don't have to pay Capital Gains Tax on your asset gains. For example, you may sell your house to buy another. You would not need to pay tax if you lived in it for the whole time that you owned it and you didn't let it out or use any room solely for business purposes. Properties with land that have less than 5,000 square metres are also exempt from paying Capital Gains Tax on the profit that you make from the sale.
Assets worth less than £12,300 and trusts that are £6,150 or under are also included in a tax-free allowance and therefore excluded from this particular tax.
How do I keep records for Capital Gains Tax?
It's important that you keep the necessary records for assets so that you can work out your gains and tax return. Records can include documents such as receipts, bills and invoices proving the date that you bought the asset and how much it was purchased for. Additional fees, such as Stamp Duty tax and professional advice, as well as the compensation you might have received for damaged assets should also be featured in your record keeping.
Missing records should be replaced if they have been lost, damaged or stolen. It should be made clear where the particular figures have been estimated, such as the provisional data of original purchase rate and gain from the sale. HMRC should be notified when final rates in the tax return are estimated.
Capital Gains Tax is due on the gains of an asset once you have disposed of it. For example, you may sell an item for more than you bought it for, which would mean that you have to pay tax on the price difference and therefore profit of the asset.
There are different rates for Capital Gains Tax depending on whether they are personal or business assets. The amount you pay in tax will depend on what Income Tax band you fall into and whether your assets are within the tax-free allowance of £12,300.
Some assets are outside of the Capital Gains Tax criteria, such as private homes with less than 5,000 square metres of land and business assets that were classified as business expenses. You must keep records to show the transactions of your assets so that HMRC can see whether you have to pay tax on them or not.