Sales of assets such as a second home or may result in a tax charge on profits - capital gains tax. Read our guide
Capital gains tax (CGT) is self descriptive - it is a tax on capital 'gains'.
If when you sell or even give away an asset and it has risen in value, you may have to pay tax on the profit.
You may also be liable for CGT if you receive money from an asset - for example compensation for a damaged asset.
But this does not apply when you sell personal belongings worth £6,000 or less or, in most cases, your main residence.
How it is worked out
CGT is worked out for each tax year (which runs from 6 April one year to 5 April the following year). It is charged on the total of your taxable gains, after taking into account:
• Certain costs and reliefs that can reduce or defer gains.
• Allowable losses you have made on assets to which normally CGT applies.
The annual exempt (tax-free) amount is £10,100 for every individual in 2010/11. If your gains (profit) come to more than your allowance, you pay tax only on the excess over the tax-free limit.
Currently, their are two different rates of CGT. Basic rate taxpayers pay 18%, while higher rate taxpayers pay 28%. If your gain takes you over the tax threshold, you pay the higher rate.
From 23 June 2010 this replaced the single rate of capital gains tax of 18% on taxable gains introduced late 2007
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Exemptions
Any gain you make when you sell your home is tax-exempt, unless you have let part of your home, or used it to run a business and claimed tax relief on that basis. In those circumstances, a proportion of the gain may be taxable, depending on a sliding scale.
You also escape tax on money made in other circumstances, including gains from the sale of your car, Isas or Peps, UK Government gilts, savings certificates and premium bonds, personal belongings worth £6,000 or less when you sell them, and betting, lottery or football pools winnings.
There is also a 10% tax rate under entrepreneurs' allowance, aimed at those selling businesses they have built up, up to a lifetime limit £5m.
Avoiding CGT
You can defer tax on gains (from any source) by reinvesting them under the Enterprise Investment Scheme (EIS). You can invest up to £200,000. Plus any gains you make are exempt from CGT if you meet the qualifying conditions.
How you pay CGT
If you've received a Self Assessment tax return, follow the guidance to decide if you need to fill in the capital gains pages as part of that return. The return tells you how to obtain these pages if you need them.
If you don't usually complete a tax return, but wish to report gains or losses, contact your local Tax Office. If you have CGT to pay you must tell your tax office in writing by 5 October following the tax year. There is a time limit for claiming losses.
For further information check out HMRC's guide
Updated September 2010, Simon Lambert, This is Money