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