When a capital asset such as a second home, shares etc, is disposed of i.e. sold, and a gain arises there can be a tax charge, called Capital Gains Tax. Disposals of capital assets can arise when assets are sold or gifted, absolutely or into Trust. Capital Gains Tax, if charged will depend on a number of factors such as the purchase cost, the sale cost, period of ownership, available exemptions and personal tax rates.

Depending on when assets were acquired, indexation and taper relief can effectively help to reduce the level of capital gain or tax. Indexation began in March 1982 and ended in April 1998, when it was replaced by Taper Relief. Indexation increases the base cost of an asset to take into account the increase of value attributable to inflation. This would help to reduce the gain, and reduce tax. Its successor, Taper Relief, reduces the percentage of the gain that is susceptible to tax. Taper Relief is available for non-business assets and business assets. For non-business assets it takes 10 years to get full Taper Relief reducing the chargeable gain to 60%. If an asset is classed as a Business Asset then it can get full Taper Relief after 2 years, bringing the chargeable gain to 25%.

Capital gains tax is payable at 10% for the Starting Rate, 20% for Basic Rate tax payers and 40% for Higher Rate taxpayers. Personal Allowances cannot be offset against these gains. Capital gains tax is payable on the 31st January following the end of the tax year in which the gain arises. In the tax year 2006-07 there is a Capital Gains Tax Allowance of £8,800. Gains over this limit are taxable at the above rates. Trusts also have an allowance and this at £4,400.

Of course, in some cases, the disposal of an asset does not always result in a gain. If an asset results in a loss, this can be useful as it can be set against any gains made in the same tax year. If there are not sufficient gains in that tax year, then the losses could be set against future gains.

If you have made a very large capital gain there are ways of deferring the tax, for example by investing in an Enterprise Investment Scheme. Please ask for further details.