Home > The Basics > CGT: Cryptic, garbled, terrifying

CGT: Cryptic, garbled, terrifying

Capital gains tax. It was big news before the Budget, and it’s still big now. What do you need to know?

Capital gains tax (CGT to its friends) is a tax on profits from the sale of assets, rather than the ‘normal’ kinds of income. Defining what’s a capital gain and what’s income has been a decades-long argument, generating some interesting legal cases (the case of the entrepreneur who made a killing on a million toilet rolls being a particular favourite of mine). When you realise there was no such thing as CGT until 1965, you understand why the argument is important.

Since then, rules have been fiddled with and rates jiggled, but the kernel of the idea is that the difference between the purchase price and the sale price, less allowable relevant costs like legal fees, is taxable. If you’ve lost instead of gained, you can use the losses to offset gains this year or in the future.

Each year, an individual is entitled to an amount of gains tax free: in the current tax year 2010/11, that’s £10,100. Fortunately, the up-shot of this means that anyone selling the odd post-demutualisation share for a farthing’s profit doesn’t need to tell the Revenue.

So, what if you make more than that £10,100 in a year? Well, from April 2008 until the Second Lord of the Treasury stood up on Tuesday, 18% of the excess was due in tax. And for many, that’s still broadly true.

Now, you need to take into account your income for the year as well (a situation we had before April 2008, by the way). Everyone can earn £43,875 this year before paying any higher-rate tax (£6,475 tax-free and £37,400 at basic rate). If you’ve got a chunk of this spare, the same-sized chunk of your gains can be taxed at the lower rate, too (18%), with the rest charged at the new higher rate of 28%.

It’s very fiddly this year because both the old and new systems apply quite separately to gains before and after Budget Day. No right-minded tax professional believed it would be done this way, but concern over income tax dodging forced the Chancellor’s hand.

There are reliefs and exemptions for various assets. Cars don’t count: we’d all be able to generate massive losses to offset gains. Your main home gets 100% relief, as long as it’s always been your main home: this can get complicated and leads to the MP CGT ‘evasion’ stories beloved of the Daily Telegraph. And entrepreneurs have their own snazzy relief to bring their tax bills down – perhaps more on that later…

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