If you buy an asset or investment than later dispose of it for more than you paid for it, you are said to have made a capital gain. Make enough gains in one particular tax year you will be liable for capital gains tax (CGT).
Everyone is allowed to make a certain level of profit each year before capital gains tax is chargd. The amount of the allowance is £8,500 for the 2005/2006 tax year. This amount is known as the capital gains tax alloance and is reviewed annually in the Budget.
Prior to 1998, a complex indexation system protected investors from paying tax on gains which were purely the result of general inflation. Now capital gains tax is charged at different rates in an attempt to reward long term investors and small business owners and to discourage speculators. There are tax incentives for investing in certain types of companies.
The usual rate which CGT is charged falls from a top rate of 40% on gains realised before year three to the lowest rate of 24% on non-business assets held for 10 years. Up until 5 April 1998, there was a facility called Bed & Breakfasting
that investors called use to minimise their CGT bills. This has now been outlawed although married people still take advantage of the principle by selling an asset and having their spouse buy it back.
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