Most people have heard about Capital Gains Tax (CGT) but many are unclear on exactly what is and when they are liable for it. This short note summarises the basics of CGT.

CGT is a tax on the profit or gain you make when you sell, give away, transfer or exchange ('dispose of') something of value - 'an asset'. You don't pay CGT on some assets, for example personal possessions worth £6,000 or less, or in most cases, your main home.

As a general rule, you have to pay CGT if you sell something for more than you paid for it. Shares, land, buildings, part of a business and expensive antiques or jewellery are the sorts of things that will usually attract a CGT liability. However, you may also have to pay CGT if you merely give something away or receive compensation or prize money.

You don't have to pay CGT when you sell or dispose of personal belongings worth £6,000 or less, your car and - in most cases - your main home. Other things that you don't have to pay CGT on include:

• ISAs or PEPs
• UK government gilts
• Betting, lottery or pools winnings
• Money that forms part of your income for Income Tax purposes, for example from property trading
• Gifts to some charities
• Foreign currency for personal use outside the UK

There are also some special circumstances that you may need to bear in mind:

• If someone dies, there is no CGT to pay at that time, but you'll have to work out the capital gain or loss when you sell or dispose of the inherited assets.
• If you transfer an asset to your husband, wife or civil partner and you live with them for at least part of the tax year in which you transfer it, there is no CGT to pay at that time. Your husband, wife or civil partner may have to pay CGT when they sell or dispose of the assets.
• You can't give assets to your children or others or sell assets to them cheaply without having to consider CGT.

Finally, in order to calculate your CGT liability the key steps are...

1. Add up all the gains you have made from the sale of assets during the tax year, from April 6 one year to 5 April the next year.

2. The tax applies on the gain, not on the amount you sell it for. For example, if you bought shares for £500 and sold them for £2,000, you have made a gain of £1,500.

3. Then subtract costs, as well as any losses made on the disposal of other assets. You may also subtract the annual exempt amount, currently £10,100 for every individual.

4. You pay 18% on anything left. (For 2009-10 there is a single rate of CGT of 18% for individuals, trustees and personal representatives on taxable gains.)

Hopefully that's made things a little clearer!