There have been some recent changes to capital gains tax, and in this article, we explain how these may impact you. As always, we are here to help, and should you want some personalised advice, do not hesitate to get in touch.
What is Capital Gains Tax?
Capital gains tax can be a complicated topic, but the basic principle is that you pay capital gains tax when you sell or "dispose of" something.
"Disposing" includes gifting it, swapping it for something else, or receiving compensation for it—such as through an insurance payout.
You only get taxed on the profit you make. For example, if you buy an asset for £10,000 and sell it for £25,000, then you have made a profit of £15,000, and some of this will be taxable.
Not everything is taxable (we said it was complicated), but you generally pay tax on any of the following:
- Most personal possessions worth £6,000 or more—except your car.
- A property that's not your main home, e.g., a second home or holiday home.
- Your main home if you've rented it out, used it for business, or it's very large.
- Shares that are not in an ISA or Personal Equity Plan.
- Business assets.
What is Exempt from CGT?
Along with cars, there are a few other areas where CGT does not apply. These include:
- Betting, pools winnings, and lottery prizes.
- UK government gilts and premium bonds.
- ISAs or Personal Equity Plans.
- Compensation for damages for personal or professional injury.
- Private Residence Relief.
When you sell your main home, as long as you have lived in it the entire time that you have owned it, haven't let part of it out, and it is smaller than 5000 square meters, then you qualify for Private Residence Relief (PRR). Just be careful, as if you deliberately bought it to make a profit, you may still have to pay CGT.
What is the CGT Allowance?
One of the biggest recent changes is the reduction of the allowance from £6,000 down to £3,000. So, using our earlier example, if you made a £15,000 profit, you would then pay tax on £12,000 of it.
What is the Tax Rate?
Basic rate taxpayers, who pay 20% tax on their income, will pay 10% capital gains tax—or 18% for residential property. A higher-rate taxpayer, who normally pays 40% tax, will have to pay 20%, or 24% for residential property (this has been reduced from 28% in April).
Gifting to Your Spouse
Assuming you have lived with your spouse during the tax year that you are making a gift, you can do this without them needing to pay CGT. However, be aware that if they dispose of this gift, they still may need to pay CGT on this.
There have been recent changes for couples who no longer live together or are divorcing, and we would advise getting some professional advice on your tax affairs to save you falling foul of CGT later down the line.