To understand the changes to Capital Gains Tax (CGT), we first need to review what the tax is and who it applies to and when.
What is Capital Gains Tax
Capital Gains Tax (CGT) is a tax levied on the profit made from the sale or disposal of an asset, such as property, stocks, shares, or other investments. The tax is applied to the difference between the purchase price (also known as the acquisition cost) and the sale price of the asset.
CGT is not applied to every transaction. Instead, it is generally applied to the sale of assets that have increased in value during the period of ownership. In the UK, CGT is applicable to both individuals and companies, although the rates and exemptions may vary.
The amount of CGT payable depends on various factors, such as the type of asset, the length of time the asset was held, and the taxpayer’s income and tax bracket. There are also certain exemptions and allowances that can reduce the amount of CGT owed.
CGT does not apply when selling your main residence, but it does apply to second homes and property that was purchased to let.
In the UK, each individual has an annual tax-free capital gains allowance, known as the Annual Exempt Amount, which allows for a certain amount of capital gains to be realised without incurring CGT. For the 2022-2023 tax year, the Annual Exempt Amount is £12,300. Any gains above this threshold are subject to CGT at the applicable rate.
It’s important to note that CGT is separate from other taxes, such as income tax and corporation tax, and it applies only to the gains made on the disposal of assets, not the total sale price.
An Example of How Capital Gains Tax Is Worked Out
Let’s consider an example to illustrate how Capital Gains Tax (CGT) is calculated for an individual selling a residential property in the UK.
Suppose Mark bought a rental property for £200,000 and later sold it for £350,000. To calculate the CGT, we first need to determine the capital gain from the sale:
Capital Gain = Sale Price – Purchase Price
Capital Gain = £350,000 – £200,000
Capital Gain = £150,000
Now, we need to consider Mark’s Annual Exempt Amount (tax-free capital gains allowance). For the 2022-2023 tax year, this amount is £12,300. We subtract this allowance from the capital gain to find the taxable amount:
Taxable Gain = Capital Gain – Annual Exempt Amount
Taxable Gain = £150,000 – £12,300
Taxable Gain = £137,700
Next, we need to determine Mark’s CGT rate based on his income tax bracket. Let’s assume he is a higher-rate taxpayer. For higher-rate taxpayers, the CGT rate for residential properties is 28% (as of the 2022-2023 tax year). We multiply the taxable gain by the applicable CGT rate:
CGT = Taxable Gain × CGT Rate
CGT = £137,700 × 28%
CGT = £38,556
In this example, Mark would need to pay £38,556 in Capital Gains Tax on the profit he made from selling his rental property.
Allowable Expenses
When calculating Capital Gains Tax (CGT), you can offset certain expenses incurred during the sale of an asset against the profit. These allowable expenses can reduce the taxable capital gain and, consequently, the amount of CGT you need to pay. Some of the common expenses that can be deducted from the capital gain when selling a property include:
Acquisition costs: The original purchase price of the property, as well as any associated costs, such as legal fees, Stamp Duty Land Tax (SDLT), and survey fees.
Disposal costs: Expenses directly related to the sale of the property, such as legal fees, estate agent fees, and advertising costs.
Improvement costs: Any expenses related to significant improvements or enhancements to the property that increased its value, such as building an extension or renovating the property. Note that routine maintenance and repair costs are not considered allowable expenses for CGT purposes.
Professional fees: If you have paid for the services of a professional, such as a solicitor or a surveyor, in relation to the purchase or sale of the property, these fees can be included as allowable expenses.
To calculate the taxable capital gain, you would subtract the allowable expenses from the difference between the sale price and the purchase price of the property. In all instances it is advisable to seek the advice of a specialist tax advisor or accountant.
Changes to Capital Gains Tax for Landlords
In the Autumn Statement 2022, Chancellor Jeremy Hunt announced that the current Capital Gains Tax allowance of £12,300 is being cut to £6,000 from April 2023 and will be cut again to £3,000 from April 2024.
In the example above this changes the amount of Capital Gains Tax payable. With an allowance of just £6,000 for the tax year 2023-2024 the amount of CGT payable rises from £38,556 to £40,320 – an additional £1,764 will need to be paid in CGT for the same property transaction.
From April 2024 the CGT payable using the example above with just £3,000 allowance rises from £38,556 to £41,160 – an additional £2,604 will need to be paid in CGT for the same property transaction.
What can landlords do to prepare for the changes?
Landlords who are planning to sell their properties should be aware of the changes to CGT and how they may affect their tax bill. Here are some steps landlords can take to prepare for the changes:
Keep accurate records of all property-related expenses: By keeping detailed records of all expenses related to your rental properties, you’ll be able to reduce your capital gains tax bill when you sell the property. Make sure you keep receipts for all expenses, including renovations and improvements as well as professional fees incurred.
Seek professional advice: If you’re unsure about how the changes to CGT will affect you, it’s always a good idea to seek advice from a professional accountant or tax advisor. They’ll be able to help you understand your tax obligations and suggest ways to reduce your tax bill.
Plan ahead: With the allowance dropping so dramatically, it’s important to plan ahead when selling your properties. Make sure you have all the necessary paperwork in order and are aware of the tax implications of the sale before you put your property on the market.
In conclusion, the changes to capital gains tax allowances will have a significant impact on landlords looking to sell their properties. By understanding the changes and taking steps to prepare for them, landlords can minimise their tax bills by including allowable expenses. It’s important to keep accurate records of all property transaction related expenses, seek professional advice and plan ahead when selling properties.
This article is meant for information only and should not be relied upon in place of specialist expert advice.
