Capital Gains Tax, or CGT, as it is usually abbreviated to, is charged when you make a gain on an asset at the time of sale.
Needless to say, that does make it sound pretty straightforward, but CGT is quite complex. There are a number of circumstances affecting when tax is payable and at what rate.
Let’s try to unpick this a little…
We will start with some good news – you have a CGT tax free allowance, which is currently £12,300 per year. So, if you sell an asset and make a gain that is under your annual allowance, there is no tax to pay. Tax is payable on anything above that figure.
Whilst we are looking at the positive, no CGT is usually payable for sale of possessions under £6,000, or if you sell your car. Likewise, it doesn’t apply on your main residence, provided you are living there, and haven’t let it out. Premium bonds, gilts and winnings on the lottery, pools or any betting are also excluded.
So, what is taxable?
- Personal possessions over £6,000 in value
- Investments in shares – not ISAs or PEPs
- Buy to let properties
- Crypto currency and bitcoin
- Business assets
- Inherited assets, if you sell them – on the difference in value between the date of inheritance and the date of sale
- Overseas assets can also be taxed – but this should be explored in more detail, as the rules are complicated
A popular choice for many clients is to purchase a property for their child to live in while studying at university, usually some distance away from home. That all ticks along very nicely, until they leave university, at which point the property is no longer wanted. By this time, the property is likely to have increased in value, so when you sell it suddenly there is large CGT bill to pay. There are ways to mitigate this, so please do talk to us before you go ahead and purchase a property.
To further complicate things, CGT is charged at different rates.
For property it is 18% if you are a basic rate tax payer and 28% if you are in a higher rate tax band. For all other gains, it is 10% at the basic rate or 20% at the higher rate.
However, given the current state of the economy, with the significant financial support from the Government as a result of Coronavirus, it is highly likely that the rates of CGT will change.
The Chancellor has already approached the Office of Tax Simplification to put forward ways to simplify the CGT tax rules, but it’s fair to say this is likely to lead to a lowering of the capital gains tax allowance and an increase in the tax rates. It is not clear when this is going to be announced, but it is possibly going to be in the April 2021 budget.
Whilst we could spend time guessing what is going to change, on the basis revised rates are not likely to be favourable, it’s vital you start tax planning now.
There are a number of ways you can protect at least part of your assets including:
- Sharing assets with your partner or spouse to make the most of both of your taxable allowances
- Sell assets over a period of time, making the most of annual allowances, by staggering your gains
- Offset any losses you may have made previously
- Donate assets to charity
- Put assets in trust
Obviously, all of these are not without their complications, so please do consider all of these before making any decisions. We would be very happy to talk these through with you and identify any implications you need to be aware of before taking action.
If you would like to discuss the implications of CGT on your finances, please contact us on 01344 875 310.