What to consider when selling your assets?
Whether you’re disposing of property, shares, or business assets, Capital Gains Tax (CGT) applies to the profit made on the sale. Understanding how it works can help you make tax-efficient decisions and legally minimize your tax liability.
CGT is not a separate tax but rather forms part of your income tax calculation. By structuring your investments and transactions wisely, you can optimize your tax position. Here’s what you need to know.
What is Capital Gains Tax?
CGT is a tax applied to the profit (capital gain) made when disposing of an asset. Unlike regular income tax, which applies to earnings, CGT is levied only when an asset is sold or transferred at a higher price than its original purchase cost.
Key Points:
- CGT applies when selling property, shares, businesses, and other investments.
- The tax is calculated as part of your normal income tax assessment.
- Only 40% of capital gains for individuals (and 80% for companies & trusts) are taxable.
The rate at which CGT is taxed depends on your marginal income tax rate, making it essential to plan strategically.
How is Capital Gains Tax Calculated?
Understanding CGT calculations can help you estimate your tax liability when selling an asset.
Basic CGT Formula
Key Components:
- Selling Price: The amount received when disposing of the asset.
- Base Cost: The original purchase price plus any improvement costs and transaction fees.
- Capital Gain/Loss: The difference between the selling price and base cost.
CGT Inclusion Rates:
- Individuals: 40% of the gain is included in taxable income and taxed at their marginal tax rate (max 18% effective rate).
- Companies: 80% of the gain is taxable at the 27% corporate tax rate
- Trusts: 80% of the gain is taxed unless distributed to a beneficiary.
Example Calculation:
If you purchase a property for R1 million and sell it for R1.5 million, your capital gain is R500,000. For an individual:
- 40% of R500,000 = R200,000 taxable capital gain.
- If taxed at a 45% income tax rate, CGT payable = R90,000.
Planning how and when you sell an asset can significantly impact your tax bill.
Exemptions & Exclusions – What’s Not Taxed?
Certain exclusions and exemptions can reduce or eliminate CGT liability.
Common CGT Exemptions:
- Primary Residence Exclusion: If you sell your primary residence, the first R2 million of the gain is exempt from CGT.
- Small Business Relief: If a small business owner over 55 years old sells their business (valued under R10 million), they may qualify for CGT relief.
- Annual CGT Exclusion: Every individual receives a R40,000 annual exclusion, meaning only gains above this threshold are taxed.
- Certain Asset Types: CGT does not apply to:
- Retirement funds.
- Personal-use assets (cars, household furniture, collectables).
- Lottery and competition winnings.
Taking advantage of available exclusions can help reduce your tax burden significantly.
Strategies to Minimize Capital Gains Tax
While CGT is unavoidable for many asset sales, smart tax planning can help reduce the amount owed.
Utilize the Annual Exclusion
By timing sales strategically, you can spread capital gains over multiple tax years to maximize the R40,000 exemption.
Hold Investments Longer
Since CGT is only triggered when an asset is sold or transferred, holding onto investments for longer periods can delay tax payments.
Offset Losses Against Gains
If you sell an asset at a loss, you can use that loss to reduce taxable capital gains from other sales in the same year.
Plan Asset Sales for Low-Income Years
Selling an asset in a year with lower taxable income (e.g., after retirement or during a career break) can reduce your CGT rate.
Use Trusts & Other Tax Structures
Strategic use of trusts, holding companies, or reinvestment strategies can reduce CGT exposure, particularly for high-net-worth individuals and businesses.
By working with tax professionals, you can implement the best CGT minimization strategies for your financial situation.
Capital Gains Tax can be complex, but strategic planning can help you minimize tax exposure and maximize returns. Whether you’re selling a property, divesting from a business, or realizing investment gains, understanding CGT rules is essential for smart tax planning.
Need expert advice? Our team at Iridium are here to guide you through capital gains tax planning and help you make the most tax-efficient decisions.
