21 May
A Complete understanding of Capital Gains Tax and its workings
Understanding Capital Gains Tax
Taxes can get complicated, identifying which one applies to you and what to do with it can be arduous and time-consuming. Each tax has different requirements, rules and thresholds, finding all this data can create confusion, mistakes and stress for someone who has never dealt with it before. Capital gains tax is one of those taxes, the best course of action to handle this tax would be to consult a personal tax accountant or an accountant in London, they would be the best resource when it comes to knowledge about all things tax-related.
What is Capital Gain?
It is the gain that arises in the value of an asset compared to its original purchase price, it can also be explained as the profit that arises from the sale of an asset such as a property or an investment. This is why the term capital gain is used. Capital refers to property or a significant investment while gain refers to profit. Not all assets sold can be classified under capital gains such as a car or your home TV.
Our in house Business Accountants or tax accountant team are experts at identifying which gains are subject to capital gains tax and which ones are not.
What is Capital Gains Tax?
As already mentioned, selling an asset for a profit is known as a capital gain. Capital gains tax is a tax levied on the profit you earn when selling an asset that has increased in value. There are some assets that are tax-free which is why it’s essential to consult an accountant or a personal tax accountant so that you aren’t taxed for something that is tax-free.
What qualifies for this tax?
There are more than a couple of things that qualify under capital gains tax. Let’s have a look at some of them.
- Most personal possessions which are worth £6,000 or more. Your car is exempt from this.
- Property apart from your main home falls under this tax.
- If your main home is let out, used for business or is quite large, it qualifies for capital gains tax.
- Any shares which aren’t in an (Individual Savings Accounts) ISA or (Personal Equity Plan) PEP.
- Business assets.
These are called chargeable assets. Assets vary in nature on some assets you can pay less tax by claiming certain reliefs. If you get rid of an asset which you jointly hold with someone else, you will have to pay capital gains tax on your share of the gain.
How do I report a Capital Gain?
The best way of going about reporting a capital gain is to hire a specialist, this could be an accountant or a reputable accounting firm. You could also shortlist a few accountants and schedule a consultation with them. Doing so can help you avoid making any mistakes in reporting your capital gains while making sure you are kept in the loop with regard to everything they are doing. If this is something you do not want to do and want to report your gains for tax purposes yourself, here’s how to go about it if you’re a UK resident.
Here are the requirements for reporting a capital gain:
- You will need to report a capital gain to HMRC if –
- The sum of all your gains exceeds your available Annual Exemption (￡12,000 for Tax Year 19/20).
- The total proceeds are more than four times the Annual Exemption.
- You will not need to report to HMRC if the total gains are below the Annual Exemption and if the proceeds don’t exceed four times the Annual Exemption.
- You can report capital gains to HMRC in two ways.
- You can use HMRC’s ‘real-time’ Capital Gains Tax (CGT) service.
- You can complete the self-assessment tax return.
Key things to know about Capital Gains Tax.
There’s a lot to know about when it comes to Capital Gains Tax. It can often be overwhelming doing your homework on the topic which is why it’s often necessary to hire a good tax accountant. This section will list a few very important things that you must know about Capital Gains Tax.
- If you’re currently outside the Self-Assessment regime, you don’t need to register for Self-Assessment in order to report a capital gain.
- You can use HMRC’s real-time service if you fall outside the Self-Assessment regime.
- Your capital gain can be reported anytime between the date you’ve prepared your capital gain calculations and 31 December following the end of the tax year in which the capital gain took place.
- You must have or set up a Government Gateway account.
- PDF or JPEG copies of all of your calculations must be attached to your submissions.
- 31st January following the end of the tax year is the deadline for the tax. HMRC will issue a payment reference number after they’ve processed the gain so that you will be able to make the payment sooner if you’d like to.
- The main benefit of this system is that penalties and interest are avoided because of how the system allows for immediate calculation, reporting, and if necessary, payment of capital gains.
- You may register for Self-Assessment if you’d like to and then report the gain on a Tax Return.
Capital Gains Tax reliefs available for individuals.
Concerning individuals, there are a couple of capital gains tax reliefs available. There is relief on the disposal of an individual’s only or main private residence.
- Land and property
- Land restricted to a permitted area
In this scenario, capital gains tax reliefs exist on the disposal of an only or main residence.
Restrictions were introduced from 6th April 2015 in respect of claims for relief by
- Non-UK residents
- UK residents claiming relief for homes abroad
In these scenarios, it is necessary to make an election to find out which of two or more properties is the one to which relief will apply.
Do I need an accountant to report my capital gains?
Computing capital gains tax has the potential to be quite a complex as well as a challenging task. It all depends on nature as well as the number of transactions undertaken by the assessee in a financial year.
While it is theoretically possible to compute your capital gains yourself, you’d save yourself a lot of headache by resorting to hiring a competent tax accountant. The problem arises in trying to understand various terms which are commonplace in calculating capital gains tax as well as doing the actual calculations. If you don’t have a background in tax, this could quickly become quite challenging. There is also the possibility of missing out on valuable tax reliefs which could reduce your tax liability significantly.
How do I select an Accountant?
Choosing an accountant or tax accountant has never been easier. Keeping the following points in mind while searching for one will make your search quite easy.
- Experience – A large part of your decision should lie in how much experience the accountant has. Ideally, the person who you’re trusting to help you save money on your taxes should have years of experience.
- Trust – You’re going to be giving this person or Accounting firm all of your bank account details as well as information. Look for a firm or tax accountant you feel completely comfortable with. Ask them if they are registered with the ICO (Information Commissioner’s Office) and are members of a Qualified Accounting body such as ACCA or ICAEW.
- Qualifications – Look for someone with the required qualifications, a chartered accountant qualified with ACCA or ICAEW would be your best bet here.
- Transparency and integrity – When you’re looking for a personal tax accountant to do your taxes, look for someone that will give you the satisfaction of knowing that all costs, as well as fees, have been discussed and agreed to in a professional setting. Make sure that all agreements, as well as prices, are transparent. A history of integrity is also helpful, look for reviews or references.
Key tips for someone who has made a capital gain
Have a look at these tips if you’ve recently made a capital gain.
- In many cases, your home is exempt – The biggest asset that most people have is their home. Depending on the current market conditions, a homeowner might make a huge capital gain on a sale. If this is you, you can breathe a sigh of relief. The tax laws will allow you to exclude some or all of such a gain.
- Claim all possible reliefs – Selling an asset can incur costs, these costs and other reliefs available can help reduce tax on your capital gain. Make sure you claim all possible reliefs and exemptions available to you.
- Capital losses can offset capital gains – If you sell something for less than its basis, you can use this capital loss to offset a capital gain. Capital losses from investments other than the sale of personal property can be used in this way. Make sure you avoid clogged losses as these can create complications if done incorrectly.
There are plenty of other things to know about capital gains tax. As always, hiring a personal tax accountant or a tax accountant or even scheduling appointments with accountants in London will help tremendously. The cost you incur availing a tax accountants services is negligible compared to the amount saved in the long run.
Clear House Accountants are specialist Accountants in London who have acquired years of experience helping clients reduce tax while improving business growth. Speak to us if you have a tax liability that you would like sorted out in the most efficient and effective manner.
Anam has a degree in accounting from the Prestigious St John’s University, and works as a senior director in Clear House.
Before working in Clear House, Anam worked in various commercial roles, the last one being the VP Operations for a prestigious business organisation,working on improving the organisation’s operational efficiency, growth and high level client management.
Anam manages clients ranging from software companies to large property developers and managers. Notably, she recently worked with a large property development company building large scale developments in London and the surrounding area.
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