Capital Gains Tax

Capital Gains Tax

When most people think of taxes, they think of income taxes, property taxes, value-added taxes, or inheritance taxes. Unless they are avid investors, they very seldom think of the capital gains tax. The capital gains tax should not be overlooked, especially if you think you will be selling any of your assets in the near future. The capital gains tax is the tax you pay on the profit you make from the disposal of an asset.

“Disposal” isn’t restricted to just the sale of the asset. You might be liable for the tax if you give it away, or transfer it to another person or entity. The tax also applies if you exchange the asset for another, or collect insurance on an asset that has been destroyed.

For the average person, most assets will be exempt from capital gains tax. Your personal automobile, your main home, and personal possessions up to the value of 6,000 pounds are exempt. It’s when you buy or sell above and beyond those personal assets that you have to be aware of the capital gains tax.

Even if you sell or transfer assets that might be subject to the capital gains tax, it has to be above an exemption amount: around 10,000 pounds for individuals. This amount is set to be raised for the budget 2011-12.  When calculating your capital gains tax, you need to figure the gain or loss on each individual item.  Then, you add up all items that qualify for your total taxable amount, subtract the exemption amount, and what remains will be taxed. If you have losses from previous years, you might be able to apply them to the current year’s gain. A flat rate of 18 percent is then applied to your total.

If you are interested in investing, you should be aware of the capital gains tax.  Your investment gains are safe as long as you don’t sell the underlying asset. If for example, you owned 500 shares of stock that increased in value fivefold in the past ten years, you don’t need to worry about the tax until you sell those shares and take advantage of the gain on them.

The same applies for real estate. If you buy houses as investments, you will have to be aware that the tax applies when you sell the house for a profit. Another way the capital gains tax can be minimized is if you buy shares that pay good dividends, but increase in value only slowly, or very little. The dividend income will be taxed as regular income, but you will avoid the capital gains tax until you sell the shares. If you break even or lose money, you pay no tax.

If you frequently deal with these sorts or transactions, or are facing a large one, it is probably worth your while to hire a qualified tax advisor. He or she will be able to tell you how you can minimize your tax liability legally, while still getting as much as you can out of the sale.