If you make a gain or profit from the disposal of certain physical or financial assets, whether held in the UK or not, then you may be liable to capital gains tax.
Capital gains tax is not as simple as income tax, for example. That's because the definition of an 'asset', in the context of capital gains, is not so clear cut.
Neither is disposal, which can mean the selling, giving away, or exchanging of an asset.
If the home you live in is your own, and it is your main residence, then no capital gains tax is due if you sell it.
But if you own a second home, such as a flat, and then sell the flat, any profit you make will be subject to capital gains tax.
The sale of your car is not subject to capital gains tax. Neither are personal (moveable) items, such as jewellery, paintings, antiques - provided each is valued at £6,000 or less.
However, if any of these personal items are valued at more than £6,000, then they may be subject to capital gains tax.
There are a number of other assets exempt from capital gains tax, including ISAs and personal equity plans, government stocks, premium bond and lottery wins.
The disposal - or the realisation - of many financial assets, such as shares or unit trusts, DO incurr capital gains tax.
So how is it calculated? In essence, it is 'lumped in' as the top part of overall earned income for any given tax year.
And, just as with income tax, there is a capital gains tax allowance - £8,800 in the 2006/2007 tax year - before the tax is due.
As well as the capital gains tax allowance, there are also other reliefs which can be taken into account.
Let's take an example, for illustrative purposes only. Suppose you have a job and your annual earnings from employment amount to £25,000.
Income tax will be due as normal - taking account of the personal allowance of £5,035, and the income tax banding rates of 10%, 22% and 40%.
But supposing, in the same tax year, we sold a painting we owned, valued at £10,000. It is liable for capital gains tax because it's value is over £6,000. But remember, we are exempt the capital gains tax allowance of £8,800.
So capital gains tax is liable on the amount of £1,200 - £10,000 minus the £8,800 allowance.
Capital gains tax is also banded, the lowest rate being 10%, then the basic 20%, and finally 40%, the highest rate.
But which capital gains tax rate should be applied to the £1,200? Simple - add it to the figure on which we pay income tax, which in this example is £25,000.
So £25,000 (income tax figure) + £1,200 (capital gains tax figure) = £26,200. That puts us firmly in the 20% capital gains tax band (£26,200 is below the 40% higher rate tax threshold of £33,300).
Therefore capital gains tax due is £1,200 at 20%, which is £240.
Again, the above example is purely for illustration of the concept, nothing more. Capital gains tax is not straightforward, so professional advice in this area is strongly recommended.
