A guide to capital gain

Capital gain is defined as the increase in the value of an investment. It is the amount of profit made on the sale of an asset (such as stock or a property) when compared to the price it was originally purchased for. The gain is not realised until the asset in question is sold, which triggers a taxable event when it becomes susceptible to Capital Gains Tax.

Capital gain can apply to any asset that makes a gain when sold. These include:

• Property
• Bonds
• Mutual funds
• Stocks and shares

Any other asset that is sold at a gain, including personal possessions such as jewellery, art and other collectibles.

The formula for calculating capital gain is pretty simple: Sale price – Purchase Price = Capital Gain.

For example, if you bought a property in 2001 for £150,000 and are now selling the same property for £250,000, the capital gain will be £100,000.

While capital gain is usually calculated from the difference between sale price and purchase price, when these are not known it’s necessary to use the market value instead. This is the case when calculating the capital gain of assets in the following situations:

• Gifts – use market value at date the gift was given
• Assets sold for less than they were worth to help the buyer – use market value at date of asset sale
• Inherited assets where you do not know the Inheritance Tax Value – use market value at date of death
• Assets owned before April 1982 – market value on 31 March 1982

While you can make a capital gain on any property that sells for more than you bought it, when it comes to taxation in the UK, you won’t need to pay tax on the capital gains made when selling your main home.

However, if you are selling a property other than your main residence (e.g. a second home or buy-to-let property) you will likely have to face a tax bill on the capital gains made in the sale of those assets. This also applies if you use part of your home as a business premises or lease it out. Here’s a little more on tax…

Capital gains signify a profit in an investment and are consequently eligible for taxation, but only when they are realised. That is to say, they only become taxable when they are sold. Most assets owned by individuals and companies are considered capital assets and are therefore subject to Capital Gains Tax.

 Take a look at our Capital Gains Tax glossary post for more information on what assets it’s paid on, when it doesn’t need to be paid and current UK CGT rates.