Capital gains are when you sell an asset and gain more money than the original purchase price. If you buy this asset, then you pay capital gains tax on the difference. This article will outline how to calculate your capital gains tax and how to pay it.
What is Capital Gains Tax?
Capital gains tax is a tax levied on the increase in the value of assets, such as stocks, bonds, and real estate. When you make money by selling an asset, the gain or profit you earn is taxable. The amount of capital gains tax you owe depends on your income and the type of asset you’ve sold.
There are three types of capital gains tax: basic, additional, and surtax. The basic capital gains tax rate is 20%. The additional capital gains tax rate is 25%, and the surtax rate is 28%.
Here are some things to keep in mind if you’re thinking about selling an asset:
- Check your capital gains tax bracket. You may be in a higher bracket if your income is high enough.
- Make sure you’ve entered the sale correctly on your taxes. Capital gains taxes are calculated based on the date of sale, not when you acquired the asset.
- Consider whether it’s worth holding onto an asset for a while to see if there’s any eventual appreciation. This can save you money in capital gains taxes.
How to Pay Capital Gains Tax?
There are a few ways to pay capital gains tax in the UK, and it can depend on how much money you make and what your taxable income is.
Here’s a rundown of the most common methods:
- Paying Capital Gains Tax, yourself: If you’re the sole trader of the asset and you make the sale, you’ll have to pay capital gains tax yourself. This means filling out a form called a Self-Assessment Tax Return (SAR). If you’re married, your spouse may also have to file a SAR if they have any share in the asset. If you’re not the sole owner, you may have to include your spouse’s share of the asset on your SAR if they’re registered as a taxpayer in the UK. To find out more about filing a SAR, visit the HMRC website.
- Paying Capital Gains Tax Through Your Employer: If you’re employed, your employer will likely take care of paying capital gains tax on your behalf. This usually happens when you sell an asset through work, such as when you sell shares in your company.
What are the Rates of Capital Gains Tax in the UK?
The UK has a range of tax rates for capital gains, with the highest rate applying to individuals who are in the top income tax bracket. The current rate for capital gains is 20%.
If you’re an individual, your marginal rate for capital gains is 28%. If you’re married and file jointly, your marginal rate is 32%. If you’re married and file separately, your marginal rate is 20%.
If you’re a company, your marginal rate for capital gains is 15%.
If you sell assets that have had a gain in value since you acquired them, you may have to pay tax on that gain at either the basic or higher rate. The higher rate applies if the value of the assets has increased by more than £10,000 (over $16,000) since you acquired them. For assets other than property, the higher rate applies if the increase in value is more than £5,000 (over $8,000).
How to Claim Capital Gains?
If you have made a profit from the sale of a capital asset in the UK, you will need to declare and pay tax on that gain. Capital gains tax is based on how much money you have made, not how much you paid for the asset. This means that if you sell an asset for less than you paid for it, you will have a capital gain and will need to declare and pay tax on that gain. If you sell an asset for more than you paid for it, you will have a capital loss and will not be required to pay tax on that loss.
To calculate your capital gains tax liability, use the following equation:
Capital Gains = Net Profit – Capital Losses
If your net profit is greater than your total losses, then you have made a profit and no tax is payable – congratulations! If your net profit is less than your total losses, then you have incurred a loss and will need to calculate and pay tax on that loss.
The calculation of your capital gains tax liability is as follows:
Your capital gains tax liability = Net Profit – Capital Losses
where Net Profit is the excess of your profits over the sum of your losses, and the Losses are all of your capital losses. To calculate what you will owe in tax, you will need to work out the difference between the amount of gain less the amount of any allowable loss on your taxable income.
The taxable income is generally an annual figure which is worked out by aggregating all the amounts that have been or will be included as income in a particular tax year (such as salary payments, interest received on investments and payments under pensions, benefits and allowances). However, where there are significant capital gains it is possible to work out a taxable income based on a quarterly estimate. If your net profit turns out to be greater than your total losses for the year then you will pay no tax.
Conclusion
Capital gains tax is a tax that you pay on the increase in the value of your assets, such as stocks, real estate or investment vehicles. When you sell an asset for more than you paid for it, you have taxable income and must pay capital gains tax on that income. This tax is based on how much profit (or loss) you made on the sale.