Capital Gains Tax is a tax on the profit you make when you sell or dispose of an asset that has increased in value during your ownership. The increase in the value of an asset from when you acquire an asset needs to be taxed under the Capital Tax Gains rule.
It is important to note that it is the capital gain on the asset you will have to pay tax on, not the amount of money you receive from the disposal of an asset.
If you jointly own an asset with someone else, you will need to pay your share of Capital Gains Tax.
For example, if you bought a second property for £200,000 which is not your main residence, and sold it later for £250,000, you would have made a £50,000 profit. Under the Capital Tax Gains rules, you will be liable to pay tax on the £50,000 profit you have made.
What does disposal of an asset mean?
Disposing of an asset includes:
- selling it
- giving it away as a gift, or transferring it to someone else
- swapping it for something else
- getting compensation for it – like an insurance pay-out if it’s been lost or destroyed
Exemptions to Capital Gains Tax
Some assets are tax-free and would not be liable for Capital Gains Tax, even if the asset appreciates in value during your ownership. Examples of tax-free assets includes:
- Property that is your main residence
- ISAs or PEPs
- UK government Gilts and Premium Bonds
- Betting, lottery or pool winnings
Moreover, depending on the amount of tax-free allowance you have in the tax year in which you dispose the asset, you may only need to pay a part or no capital gains tax at all. You only need to pay Capital Gains Tax if the total tax owed is above the annual tax-free allowance.
If you are transferring the asset to your husband, wife, civil partner, or charity, you will not usually be required to pay any Capital Tax Gains.
New tax rules of residential property selling from April 2020
From 6 April 2020, CGT incurred following the disposal of a residential property will have to be paid within 30 days of the completion date. UK residential property sellers needs to complete the following three steps within 30 days:
- Calculate the gain.
- Report the gain to HMRC.
- Make a payment of CGT to HMRC. (CGT rates for residential property are currently 18% or 28% depending on income levels）
Failure to pay on time will result in HMRC imposing interest and potential penalties. This new deadline applies even where no money has changed hands – e.g. when a property is transferred into a trust or gifted to a family member.
Before 6 April 2020, a taxpayer would report any capital gains on their self-assessment tax return, with the resulting tax being payable by 31 January following the year in which the gain was made, and therefore allowing sellers between 10 and 22 months from the sale of the property to pay CGT. For example, whilst a main residence is usually CGT-exempt, if a second property had been sold on 1 July 2020, this would be reportable on a 2020/21 tax return with the tax being payable by 31 January 2022. This gives someone a period of 20 months longer to pay the tax than they would have under the new rules.
If you are selling a property which has been your only/or main residence, you are entitled to a private residence relief (PRR). However, it needs to be noted that some people who thought they could sell tax-free may not be able to get the PRR currently. This is because the above changes coincide with the removal of letting relief and the reduction in the final period that qualifies for PRR.
It is important to note that for CGT purposes, the date of sale refers to the date contracts are exchanged rather than the date of completion. Therefore, you may still be eligible for the previous tax year rules if the date the contracts were exchanged is before 5 April 2020, and the CGT can be paid no later than 31 January 2021.
HMRC are taking steps to ensure that taxpayers are made aware of these changes, having conducted recent research indicating that their customers have very differing levels of awareness and experience when it comes to CGT. At greatest risk are customers dealing with a ‘one-off’ property transaction who may have had little, or no, previous CGT experience. ‘Multiple disposal’ customers, on the other hand, are more likely to have greater knowledge and experience and/or to use an agent who can communicate any relevant rule changes to them.
Other proposed changes are due to be implemented from April 2020 but are still under consultation (with the results due later in the summer). These are potentially significant and could affect decisions about selling properties or making them available to let.
- Changes to Private Residence Relief (PRR)
From April 2020, this relief will apply to the full period a taxpayer lived in the property as their principal residence plus the final 9 months of occupancy (unless they can claim special circumstances, such as a disability or having to move into care). This is down from 18 months (and 36 in 2014)
- Changes to Letting Relief
This is currently the lower of:
- The amount of gain attributable to the letting proportion of the property
- The amount of PRR that can be claimed
From April 2020, this relief will only be available to people who were sharing occupancy of a property, as their main home, with a tenant throughout the period of letting. This will affect most people who rent out a property that they’ve previously lived in, as it will make more of the capital gain on their property assessable to CGT.
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