Don’t get caught out by Capital Gains Tax

Did you know the Capital Gains Tax (CGT) allowance was halved in April 2024? Or that you have to pay CGT if you sell a non-residential property?

Over the last year, we have seen more and more people caught out by CGT. This is partly because the CGT allowance is now just £3,000 compared to £6,000 in 2023 which means more people are liable to pay tax, and partly because many people simply don’t understand what Capital Gains Tax is all about.

We take a look at what it is, what assets it applies to and the special conditions around selling a second home.

What is Capital Gains Tax?

Simply put, if you dispose of something which has increased in value since you bought it, you will be charged CGT on any profit made. It applies to most personal possessions worth £6,000 or more and applies to assets such as:

·      Property

·      Artwork

·      Shares (unless they are in a tax-exempt account like an ISA)

·      Antiques

·      Jewellery

·      Cryptocurrency

It’s also important to remember, it doesn’t just apply to selling an item, but also:

·      Giving it away as a gift

·      Transferring it to someone else

·      Swapping it for something else

·      Getting a compensation payout, such as from an insurance claim, if something has been lost or destroyed.

But remember, you are only taxed on the profit, and not on the full amount you make.

Are there any assets which are exempt from CGT?

Yes, there are a number of assets which are exempt from CGT. These include:

·      ISAs and PEPs

·      UK government gilts

·      Gold, silver and platinum coins

·      Premium Bonds

·      Prizes and winnings from betting and lotteries

·      Personal belongings if they are worth less than £6,000

·      Your main home as long as you haven’t let it out or it is over 5,000 square metres

·      Private cars including classic cars

·      Gifts to UK charities which can include land, property or shares.

How much is Capital Gains Tax?

The rate of CGT depends on both what type of asset you are selling as well as the tax band into which the gain falls when added to your taxable income.

For basic rate taxpayers, the rate is either 10% or 18%. For higher rate taxpayers it is either 20% or 24%. If you’re a basic rate taxpayer but the profit pushes you into the higher rate band, then you will pay CGT at both rates. Confusing we know!

There is also a special rate of 10% which applies to certain business assets, and a rate of 18% and 24% for the sale of non-residential property.

As you can see CGT is a bit of a minefield, so if you aren’t sure about whether you are liable, or how much you should be paying, please get in touch, and we’ll be more than happy to take the headache away.

How does Capital Gains Tax work?

CGT isn’t automatically taken by HMRC which means you have to declare it. And don’t think this means you can simply not mention it in the hope you won’t have to pay! HMRC have various ways of keeping an eye on things, especially where tax is concerned, and if you’re caught, you could receive a large fine and end up paying more than the original tax bill.

Generally, you report your capital gains on your Self-Assessment tax form, and then pay it at the same time you pay the rest of your Self-Assessment, but as we’ll find out, this does not apply to property.

One thing worth mentioning is unlike some other tax allowances, your £3,000 CGT allowance can’t be rolled over into the following tax year, so it’s very much a case of use it or lose it.

So, what are the special conditions around non-residential properties?

When people buy a second property, they don’t always consider the tax implications. But the bottom line is, if you sell a property which isn’t your main residence and it has increased in value, you will have to pay CGT. This includes all types of property including:

·      Buy-to-lets

·      Second homes

·      Business premises

·      Land

·      Inherited property

Once you’ve worked out what profit you’ve made on the property, the good news is you can then deduct any selling or buying costs, such as estate agent and solicitors’ fees as well as any costs for major improvements, such as building an extension. Use this calculator to get an idea of how much CGT you owe on a property.

Where people come unstuck is they don’t realise capital gains on property has to be reported and paid within 60 days of the sale. And unlike other assets, this isn’t done through your Self-Assessment tax form but through a ‘Capital Gains Tax on UK property’ account set up in the UK Property Reporting Service.

Over the last few months, there has been a surge in second homes being put up for sale prompted by inflated Council Tax rates for second homes and a worry Capital Gains Tax will increase in the autumn budget, but hopefully most people will be sensible enough to take tax advice and won’t get caught out.

But if you are thinking of selling a second home, or any other assets for that matter, and aren’t sure how to calculate your CGT or exactly what you need to do, give us a call. We will provide you with expert advice, ensure you meet all your CGT liabilities and help you pay as little tax as possible.