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Capital gains tax


What is Capital Gains Tax (CGT)?

Capital Gains Tax is a tax on the profit or gain you make when you sell or ‘dispose of’ an asset.

You usually dispose of an asset when you cease to own it - for example if you:
  • sell it
  • give it away as a gift
  • transfer it to someone else
  • exchange it for something else
  • receive compensation for it - for example you receive an insurance payout when an asset has been destroyed
Captial tax application

It's the gain you make - not the amount of money you receive for the asset - that's taxed.


The tax is applied on the taxable amount.



U.K exemptions to assets that are subject to capital gains tax.

As of 2012-07-20
  • your car
  • personal possessions worth up to £6,000 each, such as jewellery, paintings or antiques
  • stocks and shares you hold in tax-free investment savings accounts, such as ISAs and PEPs
  • UK Government or 'gilt-edged' securities, for example, National Savings Certificates, Premium Bonds and loan stock issued by the Treasury
  • betting, lottery or pools winnings
  • personal injury compensation
  • foreign currency you bought for your own or your family's personal use outside the UK

Capital gains tax applies on transfer

In general any event that results in a transfer, such as giving money to someone, or having a divorce kicks off the capital gains tax. This has an effect of kicking you when you are down. The last thing you wish to do when going for a divorce or helping your kids in need is having to pay unecessarily for the privilege.

Questions about capital gains tax.

Appeal to fairness
Why should people be taxed twice?
Prices go up with inflation, why should we be taxed on that?

Appeal to victimisation
How will the retired replace the expected earnings when they cant work anymore?

Appeal to simplicity
Is this yet another thing we have to do on our tax return?

Appeal to sense of control
Why does the government need more of our money? Don't we already pay enough?

Alos capital gains tax will reduce liquidity, why sell a property to buy another if it crystalises a tax. This will freeze up the property market.
That property you really wanted, was never listed on the market, and you will have to live further away from the school or pay more due to reduced supply.#
Capital gains tax is effectively a transaction tax. Having one will reduce transactions.

Could s capital gains tax bring in less revenue for the government and make the citizen worse off?

Example:
The assumptions below may or may not be realistic, but can show the principle it may be possible to make the citizen and government worse off under capital gains tax.
Lets say capital gains tax was 30%
And rate of return on money invested was 10% per year (for ease of calculations)
For simplicity lets say the government spend all the money raised on health. The citizen is sufficiently wealthy enough not to need spend the money. (Because that's who they really want to target).

Citizen A brought an asset in year 1 for $100 and sold in year 5 for $200
In the new scenario they would be taxed 30%  on the $100 gain.
That means Citizen A pays $30 tax and keeps $70 reinvested compounding at 10% profit

In the new scenario the government gets
Year 5 $30
Year 6 $2.1 ($70 invested, 10% profit * 30% tax)
Year 7 $2.247 ($77-2.1 invested, 10% profit * 30% tax)

Following this though, the government make $94.2 over 20 years + $30 now.
Below that is a comparison in no capital tax is taken over 20 years.
The Government makes 134.59 over 20 years and the citizen is $125 better off. 
The gains become even more pronounced over 20 years.
Notional Profit Tax Remaining
Year 5 70 77 2.1 74.9
Year 6 74.9 82.39 2.247 80.143
Year 7 80.143 88.1573 2.40429 85.75301
Year 8 85.75301 94.32831 2.57259 91.75572
Year 9 91.75572 100.9313 2.752672 98.17862
Year 10 98.17862 107.9965 2.945359 105.0511
Year 11 105.0511 115.5562 3.151534 112.4047
Year 12 112.4047 123.6452 3.372141 120.273
Year 13 120.273 132.3003 3.608191 128.6921
Year 14 128.6921 141.5614 3.860764 137.7006
Year 15 137.7006 151.4707 4.131018 147.3396
Year 16 147.3396 162.0736 4.420189 157.6534
Year 17 157.6534 173.4188 4.729602 168.6892
Year 18 168.6892 185.5581 5.060675 180.4974
Year 19 180.4974 198.5471 5.414922 193.1322
Year 20 193.1322 212.4454 5.793966 206.6515
Year 21 206.6515 227.3166 6.199544 221.1171
Year 22 221.1171 243.2288 6.633512 236.5953
Year 23 236.5953 260.2548 7.097858 253.1569
Year 24 253.1569 278.4726 7.594708 270.8779
Year 25 270.8779 297.9657 8.126337 289.8394
Total tax 94.21687

Now the same calculation for no capital gains tax.


Original notional 100
Tax rate 0.3
Notional Profit Tax Remaining
Year 5 100 110 3 107
Year 6 107 117.7 3.21 114.49
Year 7 114.49 125.939 3.4347 122.5043
Year 8 122.5043 134.7547 3.675129 131.0796
Year 9 131.0796 144.1876 3.932388 140.2552
Year 10 140.2552 154.2807 4.207655 150.073
Year 11 150.073 165.0803 4.502191 160.5781
Year 12 160.5781 176.636 4.817344 171.8186
Year 13 171.8186 189.0005 5.154559 183.8459
Year 14 183.8459 202.2305 5.515378 196.7151
Year 15 196.7151 216.3866 5.901454 210.4852
Year 16 210.4852 231.5337 6.314556 225.2192
Year 17 225.2192 247.7411 6.756575 240.9845
Year 18 240.9845 265.083 7.229535 257.8534
Year 19 257.8534 283.6388 7.735602 275.9032
Year 20 275.9032 303.4935 8.277095 295.2164
Year 21 295.2164 324.738 8.856491 315.8815
Year 22 315.8815 347.4697 9.476446 337.9932
Year 23 337.9932 371.7926 10.1398 361.6528
Year 24 361.6528 397.818 10.84958 386.9684
Year 25 386.9684 425.6653 11.60905 414.0562
Total tax 134.5955

Links

Link333 HMRC CGT
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