What are Capital Gains? and Why You May Be Paying Too Much Tax!

Did you know that you could earn up to £26,000 from your investment income without paying a penny of tax! (or £36, 000 if you include your personal allowance of £10,000). If you didn’t, read on to find out more.

Most people know that you can make tax free investments of up to £15,000 a year by making use of your ISA allowance. But what most people don’t know is that you can earn a further £11, 000 under Capital Gains before you need to start paying tax. Most people don’t know what capital gains are and this article will aid in expelling exactly what a Capital Cain is.

What is Capital Gains?
A capital gain is an increase in the value of an investment whether it be stocks and shares, a painting or even antique furniture. It is the difference between the purchase price (the basis) and the sale price of an asset.

How It Works :

The formula for capital gain is:

Capital Gain = Sale Price – Purchase Price

Note that this formula assumes the sale price is higher than the purchase price. If an investor sells an asset for less than he or she paid, this is called a capital loss.

Let’s assume you purchase 50 shares of a Company for £1 per share. After six months, the share price increases to £5. This means the value of the investment has increased from £50 to £250, for a capital gain of £200.

Why It Matters
Any capital gain you make that is below £11, 000 in a year, is considered to be tax free. If you make capitals gains above this limit, your gains are taxed at rate between 18%-28% for a basic rate tax payer or 28% for a higher rate tax payer.

So if you exceed the £11,000 limit you will need to pay capital gains tax only when it has become realized. That is, they only become taxable when the asset is sold. Until that point, any gains are considered unrealized and are not taxable. HMRC considers nearly every asset owned by individuals and companies as capital assets and thus they are subject to capital gains taxes.

Hence you can see that you can make money from your investments without paying tax on up to £26, 000 when you take into account both your ISA and Capital Gains allowance. My advise for you would be to put any long term investments in an ISA and any short term investments i.e. regular dealing of shares or selling one-off items on e-bay under your capital gains allowance. Remember, for it to be classified as a capital gain rather than a trade, it has to be something that you are not dealing with everyday such as stocks and shares or selling a one-off item!

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