What is Capital Gains Tax?

Capital Gains Tax is a tax on the profit or gain you make when you sell or otherwise ‘dispose of’ an asset, such as shares/derivatives or assets.

You usually dispose of an asset when you cease to own it - for example if you sell it, give it away as a gift, transfer it to someone else or exchange it for something else.

It's the gain you make - not the amount of money you receive for the asset - that's taxed.

Common kinds of investments

Investments liable to Capital Gains Tax when you sell or dispose of them include:

• stocks and shares in a company
• units in a unit trust
• debentures, bonds (but not premium bonds) and certain securities - these are generally investments in or loans to a company or the government

If your security is a 'gilt-edged security' (also called 'gilts'), for example a Premium Bond or National Savings Certificate, it's exempt from Capital Gains Tax. Most 'Qualifying Corporate Bonds' are exempt too.

Working out Capital Gains Tax

To work out your Capital Gains Tax you'll need to look separately at each asset disposed of that's liable to Capital Gains Tax and in straightforward cases:

• Take the disposal proceeds (usually the amount received) and deduct your costs and tax reliefs to work out each gain or loss.
• Add together all of your gains for that tax year.
• Add together all of the losses you've made for that tax year.
• Deduct any allowable losses you've made that year from the gains to work out the overall gain or loss.
• If the overall gain is below the annual tax-free allowance (known as the ‘Annual Exempt Amount’), there's no Capital Gains Tax to pay. The Annual Exempt Amount for individuals is £9,600 for 2008-09 and £10,100 for 2009-10.
• If the overall gain is above the Annual Exempt Amount, you may be able to deduct unused losses from earlier years.

If the overall gain is still above the Annual Exempt Amount, you deduct the Annual Exempt Amount and pay tax at 18 – 28 per cent on the balance.