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What Is Capital Gains Tax

January 01, 2012 | Comments: 0 | Views: 182

Capital Gains Tax or CGT as it is sometimes referred to, is the profit or gain that you make when you sell or dispose of an asset. For most people such assets will be shares in listed and limited companies, collectibles and rental properties. Your own personal home is exempt in the UK from Capital gains tax. A disposal or sale occurs when you:

sell itgive it away as a gift to someonetransfer it to someone elseexchange it for something else like a tradereceive compensation for it - for example you receive an insurance payout when an asset has been destroyed.

How do you work out the Gain?

To calculate your gain you subtract the purchase price from the sale price and the resulting figure is your gain. You may have incurred costs (allowable expenses) on the asset while it was in your possession and these can be added to the purchase price, thus reducing the gain, which you will be taxed on.

Example

Chris invested in a rental property and paid 120,000 pounds for it. He later sold the property for 160,000 pounds resulting in a profit. However, while Chris owned it he had allowable expenses from repairs and maintenance on the property of 5,500 pounds. This expense is added to the purchase price when working out the capital gain.

Capital Gain = Sale Price - (Purchase price + allowable expenses)

Chris's Capital Gain = 34,500 pounds.

Allowances

Each individual in the UK has a capital gains tax-free allowance each year. In the 2011/12 tax year this was 10,600 pounds. This allowance means that in that tax year, the individual can make a gain of 10,600 pounds and not incur taxation on it. This tax-free allowance changes each tax year. For married couples where an asset is equally and jointly owned the tax-free allowance would be used equally between the couple.

Example

Peter and Jane are married and purchased 20,000 pounds of shares in 2005 and disposed (sold) of those shares for 30,000 pounds in the 2011/12 tax year with a profit (gain) of 10,000 pounds. Capital Gain = sale price - (purchase price + allowable expenses). Their taxable gain in this example is 10,000 pounds.

Because they owned the shares jointly and equally, they both use 5,000 pounds from their personal allowances and are not liable for any tax on the disposal (sale). This leaves them both 5,600 in tax-free allowances to use on other gains in that same tax year.

Avoiding Capital Gains Tax

Specialist tax planning companies can give capital gains tax advice that can assist the tax payer in significantly reducing or even eliminating their CGT liability. Tax Planning significantly accelerates the pace at which you will create wealth and is one of the secrets of the rich.

Avoiding capital gains taxis achieved through a number of methods. Firstly, if your intention is to sell an asset in the future and you anticipate a good gain, it pays to plan for this. You may be able to create that gain in a tax-free environment like a combination of an offshore company, offshore trust or offshore foundation in a jurisdiction that has favourable dual taxation treaties with the UK resulting in less tax or no tax.

If you were not fortunate enough to have been able to have carried out tax planning in advance, there are many other ways of achieving a tax-free sale of profitable assets. You can speak to a specialist tax planning company and they will create a "paper loss" for you, that is equal to the gain, eliminating your tax liability.

If you are selling a business and you do not qualify for Entrepreneurs Relief or you still do not wish to pay the 10 per cent tax, you can convert the company to a limited liability partnership at least 6 months prior to the sale and the tax planning company will ensure that you have no tax to pay. This must be done at least 6 months in advance to circumvent anti-avoidance legislation. These are just some of the ways of avoiding capital gains tax and your specialist tax consultant will brief you on all your options depending on your own personal situation.

Jason Russell is a consultant with The Tax Experts, a UK based firm that specialises in UK Tax Avoidance Schemes and Tax Planning. The firm demonstrates to clients on a daily basis that tax in the UK is totally optional and is legal to avoid. The firm offers income tax planning, capital gains tax advice, corporate tax planning, inheritance tax planning and avoiding stamp duty and land taxes on house purchases and commercial properties.

Some of the methods used are the Employee Benefit Trust, film partnership schemes, Employer Funded Retirement Benefit Schemes, offshore company structures and numerous other legal mechanisms. To learn more about The Tax Experts please visit http://www.thetaxexperts.co.uk.

Source: EzineArticles
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