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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.
NotionalProfitTaxRemaining
Year 570772.174.9
Year 674.982.392.24780.143
Year 780.14388.15732.4042985.75301
Year 885.7530194.328312.5725991.75572
Year 991.75572100.93132.75267298.17862
Year 1098.17862107.99652.945359105.0511
Year 11105.0511115.55623.151534112.4047
Year 12112.4047123.64523.372141120.273
Year 13120.273132.30033.608191128.6921
Year 14128.6921141.56143.860764137.7006
Year 15137.7006151.47074.131018147.3396
Year 16147.3396162.07364.420189157.6534
Year 17157.6534173.41884.729602168.6892
Year 18168.6892185.55815.060675180.4974
Year 19180.4974198.54715.414922193.1322
Year 20193.1322212.44545.793966206.6515
Year 21206.6515227.31666.199544221.1171
Year 22221.1171243.22886.633512236.5953
Year 23236.5953260.25487.097858253.1569
Year 24253.1569278.47267.594708270.8779
Year 25270.8779297.96578.126337289.8394
Total tax94.21687

Now the same calculation for no capital gains tax.


Original notional100
Tax rate0.3
NotionalProfitTaxRemaining
Year 51001103107
Year 6107117.73.21114.49
Year 7114.49125.9393.4347122.5043
Year 8122.5043134.75473.675129131.0796
Year 9131.0796144.18763.932388140.2552
Year 10140.2552154.28074.207655150.073
Year 11150.073165.08034.502191160.5781
Year 12160.5781176.6364.817344171.8186
Year 13171.8186189.00055.154559183.8459
Year 14183.8459202.23055.515378196.7151
Year 15196.7151216.38665.901454210.4852
Year 16210.4852231.53376.314556225.2192
Year 17225.2192247.74116.756575240.9845
Year 18240.9845265.0837.229535257.8534
Year 19257.8534283.63887.735602275.9032
Year 20275.9032303.49358.277095295.2164
Year 21295.2164324.7388.856491315.8815
Year 22315.8815347.46979.476446337.9932
Year 23337.9932371.792610.1398361.6528
Year 24361.6528397.81810.84958386.9684
Year 25386.9684425.665311.60905414.0562
Total tax134.5955

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