Capital gains tax is levied on profits from assets ranging from stocks and second homes to rental properties and personal property.
It is traditionally applied at rates lower than income tax because the assets concerned are rather those on which people take a risk, whether entrepreneurial or via investments held outside Isas and pensions.
Income from work and interest on savings are more guaranteed, and therefore taxed differently and more heavily.
Capital gains tax is levied on assets ranging from stocks to second homes, rental purchases and personal property
Your main residence where you live, called Principal Private Residence, is exempt from CGT. That, plus a tax-free annual allowance of £12,300, means CGT is generally levied on the wealthiest taxpayers.
However, the drastic future cuts to the CGT allowance announced in Chancellor Jeremy Hunt’s autumn statement make it inevitable that many more people will have to pay it in the future.
How does capital gains tax work?
Capital gains tax is paid on profits when you sell an asset – what it sells, minus what you paid or what it was worth when it was acquired.
Depending on assets, relief is available and each person receives a capital gains tax allowance, currently £12,300 a year, to offset their gains.
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But the CGT abatement will be reduced to £6,000 in April 2023 and then to £3,000 in April 2024, in the reshuffle revealed by Hunt. To learn more about what’s changing, including tax on dividends, click here.
“If an asset was transferred to you as a gift, the value at the time of the transfer will be the valuation for the acquisition,” says This is Money tax expert Heather Rogers.
“Where the asset is bequeathed to you by will, the probate value will be the value for which you are deemed to have acquired it.
Rogers adds: “You can deduct the costs of acquisition and disposal, if any – the realtor’s and attorney’s fees when selling, for example.” You can also deduct costs where you spent money and added value to the asset.
Regarding CGT rates, if you are a higher or additional rate taxpayer (40% or 45% respectively), the CGT rate is 28% on residential property gains and 20% on property gains. other taxable assets.
For basic rate (20%) taxpayers, if your taxable gain plus your total taxable income fall within the basic tax bracket of £12,571 to £50,270, the CGT rate is 18% on the residential property and 10% on other earnings. .
If the amount is higher, the CGT rate is 28% on housing and 20% on other earnings.
The government has more information on CGT rates here.
Rogers explains here how to carry forward capital losses to offset them against capital gains.
HEATHER ROGERS ANSWERS YOUR TAX QUESTIONS
And it examines which types of personal property, called in this context “movables”, are liable to CGT and which are exempt here.
What should landlords know about the CGT?
When you have just sold your rental property, there will be capital gains tax payable on any profit.
It applies to any property that is not your principal residence – your Principal Private Residence – including private secondary residences.
CGT is levied at the rates explained above, but as earnings are added to income to provide a total amount, this means that in practice most owners making a decent profit would have to pay the 28% 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 lived in a property before renting it out.
If a homeowner rents out a property that was once their principal residence, capital gains tax only applies on the amount of the home’s value while they weren’t living there.
Previously, owners could also add an additional 18 months to the length of their stay in the property – this is known as the ‘final period exemption’.
But from this tax year, that has now been reduced to nine months.
As an example of how this works, under the old rules a homeowner who has owned their property for 10 years and lived there for two would only be taxed on six and a half years of capital gains – the 10 year period less the two years of residency and the additional relief of 18 months.
But now they will be taxed on seven years and three months of capital gains – the 10 years minus the two years of residency plus the reduced relief of nine months.
Another key CGT allowance to consider is “rental relief,” which was also rolled back this year.
Previously, when a landlord sold their old home after renting it out, up to £40,000 of their gain could be exempt from capital gains tax.
Couples could qualify for an exemption of up to £80,000.
Under the new rules, only landlords who live in the property with their tenants are now eligible for this benefit.
In the meantime, you can reduce your CGT bill by deducting some of the expenses associated with buying and managing a property.
You can offset costs such as stamp duty paid when buying the property as well as solicitor’s fees, estate agent’s fees to market the property and surveyors’ fees if a survey has been carried out when purchasing the property.
You may also be able to offset losses on other property against your capital gains tax bill.
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