In the past, most of us have not needed to worry about Capital Gains Tax – or CGT. Unless we sell off assets, like property or investments, it does not affect us.
But the world is changing. With more of us turning to investment rather than savings, we may find we become liable for CGT. What’s more, there are some major changes to the way it is administered from April 6th in the new tax year and several more in the pipeline.
At Continuum we are looking at what these changes are – and how you may still be able to reduce the impact of CGT.
How is Capital Gains Tax charged?
Capital Gains Tax is payable when you sell an asset that’s increased in value.
It is charged on the profit you make. So, if you bought an asset for £10,000 and sell it on for £30,000 you make a gain of £20,000, and you may need to pay tax on it.
But that is where the complications begin. CGT is not charged to everyone at the same rate. If you’re a higher or additional rate taxpayer you’ll pay 28% on gains from the sale of residential property and 20% on your gains from other assets, which can include investments. If the amount is within the basic income tax band, you’ll pay 10% on your gains (or 18% on residential property). You’ll pay 20% (or 28% on residential property) on any amount above the basic tax rate.
Fortunately, CGT is not charged when you sell your main home, or if your total gains in the year are below your Capital Gains Tax allowance, currently £12,300 for individuals, and £6,150 for trusts.
So what is changing?
The rates for CGT will not be changing, but several other factors will – and some of these may actually be positive for taxpayers.
More time to pay. From April 6th you will have more time to report and pay the CGT owing from the sale of a property. The 30-day deadline has been replaced with a 60 day deadline. To do this, you submit a residential property return and make a payment on account. You generally won’t need to pay CGT if you’re selling your main home unless you use part of it as business premises or lease part of it out; it will be due if you’re selling a second home or buy-to-let property.
Simpler reporting. Under the current system, gains from property need to be reported in a different way to other types of capital gains. HMRC plans to introduce a ‘single customer account’, or a one-stop shop for all of your tax needs – but although this will make things simpler, it may take some time to actually implement. Proposals include real-time reporting online and integrating CGT into the treasury’s ‘single customer account’ plans.
Changes to transfer rights. The position on liabilities for separated and divorcing couples may be made less punitive. Currently, you’re able to transfer losses to a spouse or civil partner at no gain/no loss as long as you have lived together at some point during the tax year you make the transfer. This means that couples who separate at the start of a tax year – say, 7 April – have far more time to organise this transfer than those who separate at the end of the tax year in March. The government says it is still consulting on this change.
More rollover relief. CGT can be deferred when the gains made from the sale of business assets are reinvested. For instance, if a business owner were to sell a piece of machinery for a profit, they could set that profit against the cost of new equipment. The government has said it will consult on expanding this rule to cover certain types of land holdings.
We have included the following link to the HMRC Capital Gains Tax information pages where you may find more detailed explanations to the liability to Capital Gains Tax:
Getting some help
If you are an investor – and especially a first time investor, you need to understand the implications of Capital Gains Tax. It can be hard to understand, and the government is looking at improving the guidance it provides – but there is no substitute for having an expert on your side.
At Continuum we can not only help you find your way through the CGT maze and help you see what you owe – we can help you use the solutions which will help minimise your actual liability.
Using our expertise could cut your CGT bill, and therefore making all your investing potentially more rewarding. Book a meeting with a Continuum expert today.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice, you should seek independent financial advice before embarking on any course of action.
Levels and basis of reliefs from taxation are subject to change and depend upon your personal circumstances. The HMRC rates referred to are current for tax year 2021/22.