Capital Gains Tax is a tax levied on the profit made from the sale of assets. A good example of this is shares of a company. If you buy shares, then sell them for a profit, that profit would be assessed for capital gains tax.
The UK Capital Gains tax rules differ from the U.S. So I’ll be going over both in this article. As a trained accountant, I have to advise you to seek professional help when dealing with tax matters, but the main concepts of Capital Gains tax for each nation are below:
The UK Rules
- Capital gains tax percentage:
- Lower rate taxpayers: 10%
- Higher rate taxpayers: 20%
- Submitted separately from your regular tax return.
- Capital allowance of £12,300 in the 2020/21 tax year.
- Must be recorded in the year of the sale, or disposal of asset.
- Gift’s or charitable donations of assets can be exempt from this tax.
The US Rules
- Capital gains tax is only payable on assets held for more than 1 year.
- Assets held for less than 1 year will be assessed as regular income.
- Long Term Capital Gains tax percentage:
- Lower rate tax bracket: 0%
- Mid level rate tax bracket: 15%
- Higher rate tax bracket: 20%
Definition of a Capital Gain
A capital gain is defined as follows:
“Profit gained upon the sale or disposal of an asset that has increased in value”HM Revenue & Customs
The gain you make is what is taxable, not the amount of money you receive. Hence, if you buy a stock for £1,000 then sell it for £1,100. The £100 is taxable, not the full £1,100.
If you want more information on the rules surrounding capital gains tax, or if you want to find out if you even need to pay it… You can check out our recent article: Capital Gains Tax Rules for 2021.
The UK Capital Gains Tax Calculation
You can do this one of two ways… You can use HMRC’s online calculator, or you can grab a pen and some paper. I think doing the calculation on paper really helps you understand your money and makes you better at planning for tax in the future.
For those who want to get the mind working, this is the information you’ll need:
- Date of asset purchases.
- Cost of asset upon purchase including any fees or commission paid.
- Date of asset sale.
- Sale value of asset, if you have sold for less than the market value, you will have to use the market value for you calculation.
- How much capital allowance you have left, everyone gets a £12,300 tax free allowance for the 2020/21 tax year.
Market value is the appraised value of the asset. For instance, if you give an asset to a friend or family member for below the market value, it is classed as a gift and you have to pay tax on the market value. This is the way HMRC stop people selling unwanted assets for silly amounts like £1, just so they can avoid the tax bill.
The basic equation is as follows:
(Sale proceeds – Purchase Price – Capital Allowance) * Capital gains tax band percentage
Because this is a stock market investing blog, we will be using shares in a company as the asset. The person that owns the asset is a lower rate taxpayer, so they only have to 10% tax on their profits, they have £12,300 of their capital allowance left.
- Total Shares Owned: 6,000
- Total Cost of Shares: £68,820
- Average Cost per Share: £11.47
Fast forward 10 years, and your shares are now trading at £25.40 per share, and you want to sell a proportion of them. We want to sell 75% of the shares.
- Shares Sold: 4,500
- Share Sale Price: £25.40
- Total Sale Value of Shares: £114,300
So now we need to figure out what our cost is for 4,500 shares:
4,500 * £11.47 = £51,615
Now that we know the cost of our share when we bought them, and what we sold them for, we can calculate the gain:
£114,300 – £51,615 = £62,685
So the Capital Gain is £62,685… But we need to deduct the £12,300 capital allowance that the person has.
£62,685 – £12,300 = £50,385
Now the taxable gain is £50,385.
So the tax payable on the profit from the sale of shares is 10% of this… Which is £5,038.50. This would be the Capital Gains tax bill from this sale for a lower rate taxpayer.
The U.S. Capital Gains Tax Calculation
As mentioned above, you only pay capital gains tax on long term assets. Profits made from the sale of assets owned for less than 1 year are assessed as regular income at your determined tax band rate.
These are the things you will need to consider before calculating your tax bill:
- Determine the purchase price of the assets, including any fees or commission you paid upon the purchase.
- Determine the sale price of the asset excluding any fees or commission paid.
- Figure out which tax band you are in, see below:
|Capital Gains Tax Rate||Your Annual Income|
|15%||$40,001 – $441,450|
The annual income limits change depending on the following factors:
- If you are married and filing jointly the 0% band increases to $80,000.
- If you are married and filing separately the 20% limit decreases to £248,301.
Any short term asset sales are assessed at your regular income tax band.
In this example we will be looking at a single person selling long term assets with an annual income of $52,000. Details of the sale are below:
- Purchase price of asset – $50,000
- Sale price of asset – $82,000
- Because our annual income is $52,000 it puts us in the 15% capital gains tax band.
Let’s find out our profit:
$82,000 – $50,000 = $32,000
With a $32,000 profit, we can now see what our tax bill would be at 15%:
$32,000 * 15% = $4,800
The American process for calculating capital gains tax is much simpler than the UK process, just like that we have our tax bill of $4,800 for the profit on the asset sale.
Consult a Professional
When talking tax, you should always consult a professional, no matter how simple the calculation is.
As an accountant, I constantly see people calculating their own taxes, and most of them get it wrong. Professionals have ideas and knowledge that can help people avoid unnecessary mistakes, and save money.
So before you submit anything to the tax man, make sure you double check with your accountant.