Speculation around changes to capital gains tax (CGT) have gained traction recently as the chancellor Rishi Sunak looks to fill the government's coffers after a costly pandemic spending spree. While it remains speculation for now, here's everything you need to know about the charge.
What is capital gains tax?
CGT has been in the news recently as the government looks to stem the financial fallout of the pandemic. It’s defined as ‘a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value’, and, in the year 2019-2020, the Office for Budget Responsibility calculated that it raised £9.8bn, or 1.2% of all receipts. As well as property, CGT is chargeable on assets such as shares, artwork and jewellery.
Most people who sell property are selling their main residence and are exempt from CGT because they automatically claim private residence relief. If the property you are selling is a second home or a buy-to-let investment, even if you’ve lived there in the past, it’s likely you’ll be liable for this tax. There are some rare occasions where CGT applies to those selling houses they currently live in. These include if it’s more than 5,000 square metres, you’ve sublet part of it (lodging does not count), part of your home is a business premises, or you’ve bought it as a property developer.
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How much is CGT for property?
To work out your capital gain, deduct the amount you originally bought the property for, plus any allowable expenses, from the sales price. You should keep a record of any receipts, bills, and invoices that show the date and the amount you paid for and sold the property. "HMRC advises to keep these records for at least a year following the self-assessment deadline,” advises Tim Latham, at Equilibrium Financial Planning LLP.
For residential property, CGT is charged at 18% for basic rate taxpayers and 28% for those on the higher rate. Everyone gets a CGT allowance of £12,300 a year which is doubled for couples who own a property jointly. This allowance cannot be carried over if it goes unused.
“If the capital gain is large enough to push an individual into a higher income tax bracket, they will have the higher rate of CGT on the amount that takes them over the threshold," adds Tim Latham.
What can you offset against CGT?
While the numbers involved in CGT might seem scarily high, there are expenses you can offset against any profit if you keep a record of them. These include fees incurred when you bought the property, such as solicitors’ and estate agents’ fees, and stamp duty. You cannot claim general upkeep and maintenance but, if you have made a significant improvement such as a loft conversion or an extension, this is taken into account when working out your taxable gain.
If you previously lived at the property, the period you lived there, plus an extra nine months, is exempt. For example, say you bought a house 10 years ago for £110,000 and sold it for £210,000, your profit would be £100,000. This profit is spread equally over those 10 years so, if you lived at the property for five years (including the nine-month grace period), you’re only liable for CGT on half of it, or £50,000. You can also take off your taxable allowance of £12,300, leaving £37,700. When you add together legal and estate agent fees for buying and selling, plus stamp duty, this takes an extra £10,000 off your bill. Assuming that you’ve done no major work, this leaves you with a profit of £27,700 to pay tax on.
Previously, you had just 30 days to calculate and pay CGT, but this has been extended to 60 days for completion dates after 27 October 2021. ‘If the deadline is missed, late filing penalties will be applied by HMRC and interest will be charged on late payments,’ says Kate Aitchison, of RSM UK Tax and Accounting Limited.
CGT, inherited & foreign Properties
Many people find themselves second homeowners when they inherit a property but only inheritance tax is applied if you sell it during probate. If you sell it after probate, CGT will be calculated from the valuation made when you inherited the property.
Foreign properties may also be liable for CGT. If the international property is your primary residence, the UK will not require any tax, but you must make a declaration to this effect within two years of its purchase. If your UK property is your primary residence, a tax return will need to be filed and the appropriate tax paid.
CGT in the future?
It has been rumoured that the rules around CGT may change. "There has been a lot of speculation over the past few years about the rate of CGT being increased, potentially in line with income tax (45%)," says Kate Aitchison. "Other reports suggest that CGT could be made fairer by making changes such as lowering the annual tax-free amount."
Whatever happens, those who own multiple properties should make sure they are up to date with any developments.
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