As the name suggests, Capital Gains Tax (CGT) is all about the profit. It’s essentially a tax on any gain you make when you dispose of an asset, such as selling a home. Like most taxes, Capital Gains Tax does come with its quirks and exceptions. Knowing about these can help you bank most of your profits safely!
There are two different rates of Capital Gains Tax
Capital Gains Tax involves most types of asset sales. Typical investments that can lead to Capital Gains Tax payments include things like the sale of your second property or buy-to-let property, shares and funds, and the sale of a business.
The tax is divided into two rates to make things easier for you, with one rate for property and another for all other assets. Within these two rates, the tax is further divided into a basic-rate payer bracket and higher or additional-rate payer bracket. How much you pay will, therefore, depend on:
- The asset you’ve made a profit selling
- Your tax band
Capital Gains Tax allowance can reduce the amount you pay
You’ll also have a Capital Gains Tax allowance, which means you can make a certain amount of capital gains before you have to start paying tax. This is essentially the profit you can make without having to pay a tax on it. The amount of allowance available tends to change from one tax year to another.
The interesting thing to know about the allowance is how you can double the amount you can make if you own the asset jointly with someone else. For example, spouses with joint assets can use both of their allowances before Capital Gains Tax is due. However, before you rush to transfer your assets to your partner, bear in mind that when you sell the asset, you’ll be charged based on the gain made during the period it was owned by you as a couple and not from the moment you transferred it to your partner.
The current Capital Gains Tax rates for 2019/2020
The Capital Gains Tax rates for 2019/2020 tax year are:
- On assets: 10% for the basic-rate taxpayer and 20% for the higher or additional-rate payer.
- On property: 18% for the basic-rate taxpayer and 28% for the higher or additional-rate payer.
Furthermore, the Capital Gains Tax allowance is £12,000 for an individual and £24,000 for couples (married or in a civil partnership only).
Do you pay Capital Gains Tax on all profit?
You don’t need to pay Capital Gains Tax on all of your capital gains. The tax-free profits include:
- The sale or gifting of private cars (note that it excludes cars used for business)
- Gifts to spouses or charities
- Inheritance you leave behind (although it may be subject to inheritance tax)
- Certain financial products, such as ISAs or lottery winnings
- Certain personal possessions, such as antiques worth no more than £6,000
- Your property sale if selling your only home or buy-to-let or second home that had been your main home within the past 18 months
Even with the taxable asset, your tax isn’t determined by the price tag you sold your asset for. You will only pay the tax on the gain rather than the sale price. This means that you’re allowed to deduct the price you paid for the asset together with any additional costs involved in buying and selling it before calculating your profit.
As an easy example, if you sold your property for £500,000 after having bought it for £350,000 then your profit would be £500,000-£350,000=£150,000.
Always deduct your losses from your tax bill
As Capital Gains Tax is charged on your total gains for each tax year, you should deduct any losses you might have made before calculating the tax you owe. This means that you might make a profit from selling shares while ending up with a loss from the sale of your property. The loss from the property should be deducted from the gains you made from the shares before you work out your tax bill – you might end up with nothing to pay.
The annual allowance cannot be carried forward but you are allowed to carry forward any unused losses. If you don’t use losses to offset gains this year, you could do so the next year. This is why it’s important to always submit details of your losses in your tax return even if you don’t owe any Capital Gains Tax – it’ll make it easier to use them against a future gain.
When and where to report your Capital Gains Tax
You can report capital gains to HMRC by filing a self-assessment tax return or via the Report Capital Gains Tax online service. You’ll always have to report any gains made when you file the self-assessment, even if you’ve never used the specific online service.
Be aware of legislative changes to CGT
Capital Gains Tax is one of those tax policies the government tends to tweak every so often. The rates and allowance limits tend to change from tax year to another, which makes it important to keep your eye on them.
Currently, the government has also proposed to change the law so that Capital Gains Tax on property sales would become payable within 30 days of the sale date. Right now, you have between nine and eighteen months before your tax is due. These changes take effect in April 2020.
Get more help with your taxes
The ins and outs of Capital Gains Tax can seem complicated. The above will help you understand the main points about how the tax works but you might still have a few questions. In this case, contact us at Devonshire Green for personalised tax information. We can help you get to the bottom of your taxation matters today!