A capital gain is a profit that you make when you sell an asset, like a property, a share in a company, a bond, a cryptocurrency, etc. – even a piece of art.
In other words, the gain is the difference between a higher selling price and a lower purchase price, and you usually have to pay tax on it.
Example of calculating a capital gain:
- let’s say that Sarah, a UK tax resident, bought a second buy-to-let property for £100,000 in 1990
- 29 years later, on July 1st, 2019, she sold it for £300,000
- her capital gain is £300,000 minus £100,000 = £200,000
- her taxable capital gain is the capital gain (£200,000) minus the Capital Gains Tax allowance (£12,000 in the 2019/2020 tax year) = £188,000
- This is what she will pay Capital Gains Tax on.
If you sell an asset for less than you bought it for, you made what it’s called a “capital loss”, and you can use it to reduce other capital gains and pay less tax.