Capital gains tax is levied on profits from assets ranging from shares to second homes, buy-to-let properties and personal possessions.
Rumoured changes in the Autumn Budget could see an increase in the current rates to boost the Treasury’s coffers.
CaGT rates are traditionally applied at lower rates than income tax because the assets in question tend to be those on which people are taking a risk – whether an entrepreneurial one, or via investments held outside Isas and pensions.
Employment income and savings interest are more guaranteed, and so taxed differently and more heavily.
However, profits from investment and property tend to be made by wealthier people, and the Prime Minister has said those with the ‘broadest shoulders should bear the heaviest burden’, so this makes CGT a prime target for a hike in the Budget.
Capital gains tax is levied on assets ranging from shares to second homes, buy-to-lets and personal possessions
Your main home that you live in, known as your Principal Private Residence, is exempt from CGT. That, plus an annual tax-free allowance that until April 2023 was £12,300, has meant CGT is typically levied on wealthier taxpayers.
However, radical cuts to the CGT allowance – to £6,000 in spring 2023 and £3,000 from April 2024 – make it inevitable that many more people will have to pay it in future.
Capital gains tax is levied on your profits
Capital gains tax is paid on the profits when you sell an asset – what it sells for, less what you paid for it or it was worth when acquired.
Depending on the asset there are reliefs available and each person has a capital gains tax allowance, which is currently £3,000, to offset against their gains.
‘If an asset was transferred to you as a gift, then the value at transfer will be the valuation for acquisition,’ says This is Money’s tax expert Heather Rogers.
‘When the asset is left to you through a will, then the probate value will be the value you are deemed to have acquired it for.’
Rogers adds: ‘You can deduct costs of acquisition and disposal if relevant – the estate agent’s and solicitor’s fees on sale, for example. You can also deduct costs where you have spent money and have added value to the asset.’
Regarding CGT rates, if you’re a higher or additional rate taxpayer (40 per cent or 45 per cent respectively) the CGT rate is 24 per cent on gains from residential property and 20 per cent on gains from other chargeable assets.
For basic rate taxpayers (20 per cent), if your taxable gain plus your total taxable income fall within the basic income tax band of £12,571 to £50,270, the CGT rate is 18 per cent on residential property and 10 per cent on other gains.
If the amount is higher, the CGT rate is 24 per cent on residential property and 20 per cent on other gains.
The Government has more information on CGT rates here.
Rogers explains how to carry forward capital losses to offset them against capital gains here.
HEATHER ROGERS ANSWERS YOUR TAX QUESTIONS
And she looks at which types of personal possessions, referred to in this context as ‘chattels’, are liable for CGT and which are exempt here.
What do buy-to-let landlords need to know about CGT?
When you come to sell your buy-to-let property, there will be capital gains tax to pay on any profit.
It applies to any property which is not your main home – your Principal Private Residence – including private second homes as well.
CGT is levied at the rates explained above, but as gains are added to income to deliver a total amount this means that in practice most landlords making decent profits should pay the 24 per cent rate.
There are two reliefs you can get on your CGT bill, but they are both less generous than they once were.
First, there is a capital gains tax regime specifically for ‘accidental’ landlords, who once lived in a property before going on to let it out.
If a landlord rents out a property that was once their main home, capital gains tax only applies on the amount the home went up in value while they weren’t living there.
Landlords can also add an extra nine months onto the amount of time they lived at the property – this is known as the ‘final period exemption’.
As an example of how this works, a landlord who has owned their property for 10 years and lived in it for two would be taxed on seven years and three months of capital gains – the 10 years, minus the two years residency plus the reduced nine months’ relief.
Another key CGT allowance to be aware of is ‘lettings relief’.
When a landlord sells their former home after renting it out, up to £40,000 of their gain can be exempted from capital gains tax – but this now applies only if they lived in the property with their tenants.
Meanwhile, you can reduce your CGT bill by deducting some of the expenses associated with buying and managing a property.
You may also be able to offset losses on other property against your capital gains tax bill.
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