Capital gains tax (CGT) is the tax charged on the profit you make when you sell an asset. But be aware that it is only on the gain, not on the price of the item as a whole. So if you buy an item for £100,000 and later sell it for £120,000, you will only have to pay CGT on the £20,000 gain.
Areas where you might pay CGT include:
Shares, stocks and bonds
Property (first homes are exempt)
Your company (often companies have no value to begin with or are given a nominal value of £1. Therefore, you may have to pay CGT on the entire value).
Physical assets such as machinery, plant equipment (if you make a profit)
However, you must distinguish between what are capital gains and what is income. For instance, if your company specialises in restoring vintage cars and then selling them on for a profit on a regular basis, then this is considered income not capital gains.
Rates of CGT
The current rate of CGT is 18%, although there are various reliefs available for businesses and individuals which can reduce this figure. Entrepreneurs Relief is one of these and provides owner managers with the chance to pay CGT at 10% for the first £5m. After £5m you will be charged at the full rate of 18%. However, also note that this is a lifetime limit and was primarily designed for retiring owner-managers. You should also be aware that the current rules on Entrepreneurs Relief were brought in by the coalition government in June 23, 2010. So if you are paying CGT on disposals from earlier than that then the rates are higher. Speak to your accountant if you are unsure.
Another form of relief can be claimed if you sell an asset for less than you bought it for – with cars this is very common. So if you end up with a capital loss you can use that to offset gains in other areas and reduce your overall bill.
Finally, be aware that it doesn't matter where these assets are located. If they make a profit then you are liable for the tax. This is a very important point to consider when looking at offshore investment opportunities. The fact that an offshore trust may not report a profit does not mean that, for the purposes of CGT, it does not exist. It means that if you do not report it you would be considered to be trying to evade tax, which is a criminal offence.