Capital gains are profits from selling assets such as an investment property that have appreciated in value. Understanding what capital gains are will help you to calculate the profitability of an investment and will have an impact on your overall return on investment.
Capital gains are the profits you make from selling an asset that has appreciated in value. Whether it’s a stock, a property, or another type of investment, the difference between the purchase price and the selling price constitutes the capital gain. It’s important to remember that capital gains are taxed based on the profit made, not the total amount of money received from the sale.
The tax rate applied to your capital gains can vary depending on how long you’ve held the asset and your income level. Typically, assets held for more than a year are subject to lower tax rates compared to those held for a shorter period.
Most individuals will encounter capital gains when they sell property, stocks or bonds. For example, if you bought a property for £100,000 and sold it later for £150,000, your capital gain would be £50,000. This £50,000 would be included in your taxable income as taxable gains and subject to capital gains tax, potentially impacting your overall tax bill.
Capital gains are realised when you dispose of an asset, which can happen in several ways. Some common scenarios include:
Essentially, any time you part with an asset and it results in a profit, you may have to pay capital gains tax.
Typically, the person responsible for paying the capital gains tax is the one selling or transferring the asset. However, there are exemptions, such as when you transfer assets to your spouse, civil partner, or a charity. In these cases, the transfer is typically CGT exempt. It’s also worth noting that UK residents may be liable for CGT on disposals of assets located anywhere in the world.
In certain circumstances, such as divorce or dissolution of a civil partnership, the transfer of assets can trigger capital gains tax. Similarly, when giving an asset as a gift, the rules vary depending on the recipient. For instance, if the recipient is not your spouse or civil partner, the transfer may be subject to capital gains tax.
Calculating your capital gains involves the following steps:
Capital gains tax, a form of income tax, can apply to a wide range of assets within the same tax year, including:
Just about any capital asset, including UK residential property, that can appreciate in value and be sold or transferred can be subject to capital gains tax.
Some assets are treated differently under capital gains tax rules. For example, property used by a business or as a rental property is generally not eligible for the lower capital gains rates that apply to personal investments, such as residential property. Depreciable business property also follows different rules and is not subject to the lower capital gains tax rates.
It’s crucial to understand the specific rules that apply to different types of assets. For instance:
In some cases, specific reliefs and exemptions can apply, such as Business Asset Disposal Relief, which can reduce the amount of capital gains tax you have to pay when selling certain business assets. Understanding these nuances, as well as your personal allowance and the implications of stamp duty land tax, can help you better manage your investments and minimise your tax liabilities during a tax year.
We handle the entire process from beginning to end, offering you an affordable way to build your property portfolio with built-in equity, no lump sum requirement, high rental yields, and capital appreciation. Our service provides a completely hands-off UK property investment experience, supported by our in-house specialist mortgage and management teams.
Understanding capital gains and the taxes associated with them is vital for effective financial planning. Our expert team can help you to understand the entire investment process giving you full peace of mind whilst allowing you to build your investment portfolio.
By choosing to invest with Prosperity Wealth, you can take advantage of the expertise of a reputable property management firm, enhancing your investment’s return on investment and reaching your financial goals with ease and confidence.
Contact us online or call us directly on +44 121 237 4610 and start your journey towards property investing today.
The new capital gains rules for from the 6th April 2024 entail a 10% or 18% rate for basic rate taxpayers, and a 20% or 24% rate for higher or additional rate taxpayers.
You have to pay capital gains tax when you sell or dispose of an asset that has appreciated in value, whether through selling, gifting, transferring, or swapping the asset.
Yes, transfers of assets to your spouse, civil partner, or a charity are generally exempt from capital gains tax. Specific exemptions and reliefs exist for certain types of assets and situations.
To calculate capital gains, subtract the original purchase price and any related costs or improvements from the selling price of the asset. This gives you the difference that represents the capital gains.
