Capital Gains Tax In A Nutshell

Capital Gains Tax is due to change in April 2020, with draft legislation already released by the Government. So what exactly is Capital Gains Tax, and what’s going to be different when the changes come into force? 

 

What Is Capital Gains Tax?

Capital Gains Tax is the tax that is due on an asset when it is sold if it has appreciated in value (see next section for exceptions). 

You will be subject to Capital Gains Tax if you sell a property which is not your main residence, for example, or when passing on money to loved ones in a trust. 

There is a tax-free allowance, but it’s only £12,000 for the 2019-20 tax year (or £6,000 for trusts) so if your assets have appreciated significantly you may still be exposed to Capital Gains Tax.

 

What Do You Need To Pay?

Capital Gains Tax rates range from 10% to 28% – remember that you only pay tax on the amount gained, not on the total sale amount. So if you bought a second house for £400,000 and then sold it for £450,000, you’ll only be charged Capital Gains Tax on the £50,000 gain. 

The rates themselves can be slightly complicated, as there are different rates for higher rate taxpayers, and different rates for property vs non-property sales.

1) Higher rate taxpayers

If you’re a higher rate taxpayer, you’ll pay:

• 28% on your gains from residential property
• 20% on your gains from other assets

2) Basic rate taxpayers 

If you’re a basic rate taxpayer, the amount you pay depends on 1) your taxable income, 2) the size of the gain, and 3( whether or not your gain is from residential property.

You’ll first need to work out your total taxable gains, then deduct your tax-free allowance (usually £12,000) from your total taxable gains. Then add this amount to your taxable income. If the final number less than £50,000 (the basic Income Tax band for 2019-20) then you’ll pay 10%, or 18% on residential property. If it’s more than £50,000, you’ll pay 20%, or 28% on a residential property. 

See what we mean? Slightly complicated! If you’d like help working all this out, get in touch. It’s better to be safe than sorry when it comes to Capital Gains Tax. 

3) Other rates

If you’re a trustee, you’ll also pay 28% on your gains from residential property and 20% on your gains from other assets, again with the exceptions listed below. 

If you’re a sole trader or partnership, your gains may qualify for Entrepreneurs’ Relief which means you’ll only pay 10%. We can help you determine if that applies to you or not. 

 

When DON’T You Pay Capital Gains Tax? 

You are exempt from paying Capital Gains Tax when: 

• You’re selling your main residential property
• You’re selling a car
• Your possession is worth less than £6,000
• You’re gifting money to a spouse or civil partner, or a charity
• The gain is within your tax-free allowance

 

What’s Changing in April 2020?

The changes proposed for April 2020 aim to reduce the delay in Capital Gains Tax payments and so focus on cutting deadlines: 

1) 30 day window for Capital Gains Tax payments on residential property sales

From April 2020, sellers of residential property must advise HMRC of any taxable gain within 30 days of completion AND make an estimated tax payment within that same timescale. 

At the moment, sellers of residential properties are taking between 10 and 22 months to pay Capital Gains Tax, so this new 30 day deadline will be a significant change.

Anyone thinking of selling a second property from April 2020 will have to think very carefully about timings, as there is such a small window in which to declare and pay any taxable gains to HMRC. These changes come on top of recent increases in Stamp Duty on second properties AND reduced tax relief for landlords. 

2) 9 month deadline on final exempt period

Currently, if a property has been occupied as an individual’s private residence at any time, the final 18 months of ownership are disregarded for the purposes of Capital Gains Tax. This applies even if the individual was not living at that property when it was sold. But from April 2020, this will be reduced down to 9 months. 

3) Reduction in lettings relief

Up until now, lettings relief has been available to people who sell a property that they’ve rented out as long as they’ve also lived there at some point. This will no longer be the case from April 2020, as lettings relief will be limited to those property owners who are in shared occupancy with a tenant.

 

How To Get Help

Warr & Co are here to help when it comes to Capital Gains Tax. We keep on top of all the proposed changes and can help you prepare. Get in touch for a free, no-obligation consultation today.