When do I have to pay Capital Gains Tax?

As a general rule, you have to pay Capital Gains Tax (CGT) if you sell something for more than you paid for it. Shares, land and buildings, expensive antiques or jewellery, or part of a business are the sort of things that will usually attract a CGT liability. However, you may also have to pay CGT if you merely give something away, or if you receive compensation or prize winnings.

Exceptions to the tax

If your gains come to less than £8,800 (for the tax year 2006-2007) or £9,200 in 2007-2008 you will not have to pay any CGT.

You also do not have to pay CGT if you are selling or otherwise passing on personal belongings that are worth less than £6,000, or if you give your assets away to a registered charity.

Nor do you have to think about CGT when selling your private car and your main home, or when you receive money from Isas , Premium Bonds, betting, lottery or pools, or personal injury compensation.

How to get out of paying CGT

Believe it or not, there are ways to avoid paying CGT that won't attract the ire of the taxman, although most of these techniques merely defer CGT to a later date or transfer it to another person.

One popular method is to transfer your assets to your spouse or civil partner. As long as you are legally married and living together there is no CGT to pay at that point. However, they will become the legal owner and, if they later sell the asset, they will have to pay CGT then.

You can also escape CGT in the short-term by reinvesting gains up to £200,000 under the Enterprise Investment Scheme. You need to make sure you meet the qualifying conditions (see website below)

You can also reduce the amount of CGT you have to pay on some assets by offsetting a loss. For example, if you make a loss when disposing one asset that would attract CGT, you may be able to deduct this loss from capital gains you have made on other assets.

Recent changes

You may have heard a lot of noise about CGT recently. That is because in October, the Government abolished taper relief, which had previously allowed some taxpayers to reduce their CGT bill by up to 40 per cent. Instead, a flat rate of 18 per cent will apply from April 6 next year. Small Business owners have protested against the changes, which effectively increases the amount of tax they have to pay as they are now no longer able to gain taper relief.

The Chancellor announced a partial climbdown when he unveiled plans for entrepreneurs’ relief. Business owners - those with a stake of more than 5% in the company they work for – will pay only 10% tax on gains up to £1m

Calculating your CGT liability - Step 1

When calculating your tax bill from 2007-2008, you will still have use the old system. The calculations are complex and it is advisable to speak to an accountant or contact your local tax office.

The first thing you should do is add up all the gains you have made from the sale of assets during the tax year, that is, from 6 April on year to 5 April the next year.

The tax applies on the gain - not on the amount you sell it for. For example: If you bought shares for £500 and sold them for £2000 you have made a gain of £1500.

Then subtract costs, as well as any losses made on the disposal of other assets. You may also subtract the annual exempt amount, currently £9,200 for every individual.

Then choose the appropriate CGT rate.

Choosing your CGT rate

On gains made before April 2008, you are taxed at the same rate as your income. That is:

10 per cent where the gains fall below the starting rate limit for income tax of £2,230

20 per cent where they fall between the starting rate and basic rate limits for income tax, that is, between £2,231 and £34,600

40 per cent where they fall above the basic rate limit for income tax, that is, £34,601 and above

However for gains made from April 2008, you are charged a flat 18 per cent.

CGT when you give something away

You may have to pay CGT when you give something away, even if you don't receive any money for it or receive less than it is worth, if the asset has increased in value since you bought it.

For example. Say you bought a flat costing £75,000 and allowed a relative to use it. You later decide to sign the flat, now worth £100,000, to the relative. You have made a capital gain of £25,000 and you must pay CGT on that amount. It does not matter whether you receive any money for the flat from the relative.

Paying the taxman

If you don't usually complete a tax return, but wish to report a gain or loss, contact your local Tax Office and ask for a Self Assesment return, including the relevant pages for CGT.

If you already receive a Self Assessment tax return, it will tell you if you need to request and fill in the CGT pages.

You need to tell your local tax office in writing by the 5 October deadline if you have gains or losses to report from the previous tax year.

CGT on inheritances

You do not have to pay CGT if you inherit something. However, if you later sell or give away the asset, you will have to pay CGT then. For example, say you are left some shares in a relative's will which, att the time of their death, are worth £6000. You do not have to pay any CGT but if you later sell them for £9000, you will have to pay CGT on the gain of £3000 (£9000 less £6000).

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