How capital gains tax affects you
- 27 May 2010
- From the section Business
Capital gains tax is the levy you pay on the profits - or gain - that you make when you sell, give away or dispose of something you own, such as shares or property.
But the rate of this tax is being hotly debated by members of the new coalition government.
At present, there is a flat rate of 18%, but this has only been the case for the past couple of years.
The new government has indicated that it wants to put the rate back up to a similar threshold seen with income tax.
This has prompted some voices of discontent, some suggestions that assets are being sold ahead of any change, and not a great deal of detail.
Who qualifies for a higher rate, what that rate will be, and when it comes into force are questions that may be answered in Chancellor George Osborne's first Budget in June.
What is capital gains tax?
HM Revenue and Customs explains that you pay capital gains tax when you dispose of an asset you own, whether in the UK or overseas.
This can be when you sell it, give it away to someone, transfer it to someone else, exchange it for something else, or receive compensation for it - such as when you receive an insurance payout after an asset has been destroyed.
The tax is paid on the gain - or profit - you make, not the value of the asset itself. However, there is a tax-free allowance on the first £10,100 of any gains.
If you inherit an asset, it is not liable to capital gains tax until you sell or dispose of it.
And some assets are exempt, such as your car, personal possessions disposed of for £6,000 or less and, usually, your main home.
That is why capital gains tax is such an issue for people wishing to sell second homes, as well as for property investors.
It is also important for people reaching retirement who might be considering cashing in some of their assets to live on in retirement.
What is the history?
Capital gains tax is complicated, but it is a relatively new entrant to the tax system.
It was introduced in the early 1960s as a tax on short-term gains, but eventually merged with longer-term gains.
In the late 1990s, taper relief was introduced, which meant that the longer assets were held on to, the less tax was paid.
People paid 40% if they were a higher rate taxpayers and, for example, sold a rental property within three years of buying it.
Then, in 2008, a flat rate of 18% was introduced. It means gains are now taxed at 18%, irrespective of whether an asset is held for a day or for 10 years.
The latest figures show that capital gains tax brought in £7.6bn for the government in 2007 to 2008.
What is the debate about?
The new government said rates would go up again and be brought closer to income tax.
But this would be for individuals, rather than entrepreneurs. The definitions of who might pay a higher rate is one of the issues being discussed and which will need to be ironed out.
The intention of the reform is to prevent the rich from diverting their income into capital in order to pay far lower levels of tax.
Opponents argue that the move could harm the UK's competitiveness as entrepreneurs would be hit the hardest and may leave the country.
There are also fears that the move would cause a "fire sale" as property investors, for example, try to sell their assets before the new higher rate of tax is implemented.
In the US, an increase in capital gains tax failed to bring in more revenue, so there is debate about whether it will be successful.
The Budget should answer some of these questions on 22 June.
There is more information about the tax on the HMRC website.
Flipping second homes for capital gains tax purposes is explained in this article.