What is Capital Gains Tax?

The upcoming 5th October deadline will mean very little to many people, particularly those in the PAYE system who may have never submitted a personal tax return. However, any individuals with new income sources or capital gains in the 2021/22 tax period must notify HMRC accordingly by this date. This will register them for self-assessment and trigger the issue of a tax return. This could be a brand new task for young UK crypto investors who have cashed out of their investments.

What is Capital Gains Tax?

CGT applies when a gain is realised on the disposal of an asset. In general, the gain will be calculated from the difference between the amount realised (‘the disposal value’) and the cost originally incurred (‘the base cost’). For example, if an investment is purchased for £25,000 and later sold for £50,000, the initial ‘gain’ is calculated as £25,000. In theory, tax is due on this gain by the individual that has disposed of the asset.

The tax rules surrounding Capital Gains Tax (CGT) make this simplistic example much more complex. Certain types of assets require no CGT charge, and special assets require specific calculations. There are allowable deductions such as improvement and incidental costs. There are several different applicable rates, depending on the asset disposed of, your annual income, and the history of your disposals. Perhaps most importantly, every individual is entitled to an Annual Exempt Amount which will exempt part of the net annual gain.

There are plenty of steps which can be taken to mitigate a CGT tax bill effectively, but it will require planning, careful consideration of your circumstances and a trustworthy tax adviser that can help you navigate through the rules. If you would like tax advice or assistance with your return, please do not hesitate to get in touch.