Economy

What is capital gains tax and how much is it?

Capital gains tax applies to profits made from assets such as shares, second homes and buy-to-let properties.

Because the assets being considered are those that people are taking a chance on, whether it’s an entrepreneur or through investments outside Isas or pensions, they have been traditionally charged at lower rates than income taxes.

Savings interest and employment income are more secure and therefore taxed more heavily and differently.

Capital gains tax is assessed on assets that include shares, second homes, buy to let and personal property.

CGT is not applicable to your principal private residence, which is the main house you live in. That, plus an annual tax-free allowance of £12,300, has meant CGT is typically levied on wealthier taxpayers.

However, future drastic cuts to CGT allowance made by Chancellor Jeremy Hunt in his cash-grabbing Autumn Statement make it likely that more people will need to pay it in the future. 

What is capital gains tax?

Capital gains tax applies to the proceeds of a sale of an asset. It is the difference between what it sells at and what you paid for it.

Depending on the asset there are reliefs available and each person has a capital gains tax allowance, currently £12,300 each year, to offset against their gains.

Got a tax question? 

Heather Rogers is founder and owner at Aston Accountancy.

She We can answer any question you may have about tax codes, inheritance, income, capital gains, or other tax topics.

You can write to Heather at experts@thisismoney.co.uk. Please complete the following: TAX QUESTION In the subject line.

But the CGT tax-free allowance will be cut to £6,000 in April 2023 and then to £3,000 in April 2024, in the shake-up revealed by Hunt. You can find out more information about what is happening, including the impact on dividend tax.

Heather Rogers, a tax expert at This is Money, says that if an asset was given to you as a gift then its value at transfer will equal the acquisition valuation.

“When an asset is left to you in a will or other legal document, then its probate value will be the amount that you are deemed have acquired it for.

Rogers states that you can deduct the costs of acquisition or disposal, if they are relevant. This includes fees paid by estate agents and solicitors on sale. Costs can be deducted if you have spent money or added value to an asset.

Concerning CGT rates: If you are a taxpayer at a higher rate (40 percent or 45 percent respectively), the CGT rate for gains from residential property is 28% and gains from other chargeable assets is 20%.

For basic rate taxpayers (20 per cent), if your taxable gain plus your total taxable income fall within the basic income tax band of £12,571 to £50,270, the CGT rate is 18 per cent on residential property and 10 per cent on other gains.

If the amount exceeds the CGT rate, it is 28% for residential property and 20% on other gains.

The Government Find out more about CGT rates here.

Rogers explains here how to carry forward capital loss to offset capital gains.

HEATHER ROGERS ASSISTS YOU WITH YOUR TAX QUESTIONS

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She also examines which personal possessions (referred to here as “chattels”) are subject to CGT and which ones are exempt.

What should landlords who own buy-to-let properties know about CGT

Capital gains tax will apply to any profits made when you sell your buy-to–let property.

It applies to any property other than your main residence, your Principal Private Residence, and private second homes.

CGT is levied at these rates, but since gains are added onto income to produce a total amount, it means that landlords with decent profits should pay 28 percent.

Two reliefs can be obtained on your CGT bill. But they are not as generous as they used to be.

First, there is an exemption from capital gains tax for landlords who have lived in the property and then let it out.

Capital gains tax is only applicable to landlords who rent out their primary residence.

An exemption known as the “final period exemption” was also available to landlords in the past. This allowed them to increase the length of their tenure by 18 months.

However, this has been reduced to 9 months as of the current tax year.

As an example of how this works, under the old rules a landlord who has owned their property for 10 years and lived in it for two would only be taxed on six-and-a-half years of capital gains – the 10 year period minus the two years of residency and the added 18 months’ relief.

But now they’ll be taxed on seven years and three months of capital gains – the 10 years, minus the two years residency plus the reduced nine months’ relief.

Another important allowance for CGT to remember is “lettings relief”, which was also rolled back this past year.

Previously, when a landlord sold their former home after renting it out, up to £40,000 of their gain can be exempted from capital gains tax.

Couples could benefit from an exemption of up to £80,000.

The new rules state that landlords must live with tenants in order to receive this benefit. 

You can still reduce your CGT by deducting expenses associated with the purchase and management of a property.

You can offset costs such as the stamp duty paid when you purchased the property as well as solicitors’ fees, estate agent’s fees to market the property, and surveyors’ fees if a survey was carried out when you purchased the property.

Other property losses may be offset against capital gains tax.

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Jacky

The author of what'snew2day.com is dedicated to keeping you up-to-date on the latest news and information.

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