Capital Gains Tax (CGT)
Updated for Budget 2004
Capital Gains Tax is a tax on gains made when you sell assets - things like shares, a holiday home or an oil painting.
If you buy an asset or investment then later dispose of it for more than you paid for it, you are said to have made a capital gain. Make enough gains in one particular tax year and you will be liable for capital gains tax (CGT).
Everyone is allowed to make a certain level of profit each year before capital gains tax is charged. The amount of the allowance is £8,500 for the 2005/2006 tax year. This amount is known as the capital gains tax allowance and is reviewed annually in the Budget. In reality very few people exceed their annual capital gains tax allowance. It affects only about one in 500 tax payers!
Prior to 1998, a complex indexation system protected investors from paying tax on gains which were purely the result of general inflation . Now capital gains tax is charged at different rates in an attempt to reward long term investors and small business owners and to discourage speculators.
There are tax incentives i.e. a lower CGT tax rate for investing in certain types of companies. These are known as business assets. "Business assets" are shares quoted on the AIM market, unquoted trading companies or shareholdings in quoted trading companies in which you are an employee or, if you are an outside investor,in which you have more than 5% of the company's shares.
The usual rate at which CGT is charged falls from a top rate of 40% on gains realised before year three to the lowest rate of 24% on non-business assets held for 10 years.
Thus, for example, small business owners who're selling up will be taxed on their proceeds at a minimum tax rate of 10%, providing they have been in business for at least four years (up until 5 April 1998, business owners over 50 years of age who were retiring would benefit from retirement relief, but this has now been scrapped).
Up until 5 April 1998, there was a little trick promoted by stockbrokers to help investors minimise their CGT bills - it was called Bed & Breakfasting but has now been outlawed although married people still take advantage of the principle by selling an asset and having their spouse buy it back. This is a loophole which works on the basis that transfers between husband and wife are tax free and it works on the basis that the Inland Revenue don't get too heavy (they already have the powers to stop the practice if they choose).
Finally, spreading assets among members of a family can make full use of each person's allowance. However, transferring an asset to any family member other than your spouse counts as a disposal for CGT purposes.