Capital gains tax kicks in when you profit from the sale of something you own, usually property, shares or possessions.
The key point to remember is that this tax applies on the profit you make from the sale, not how much you sold it for.
What you pay usually depends on how much profit you make on the sale and your income tax band.
Each year there are tax-free thresholds for individuals and trusts, while there are some reliefs for individuals and businesses.
Given the complexities of capital gains tax, our personal tax planning service ensures you only pay what you need to.
Capital gains allowance and rates
Firstly, any thresholds, rates and reliefs are announced by the Chancellor in the Budget. Sajid Javid should reveal his hand in the Spring Budget on 11 March 2020.
You can make profits of up to £12,000 without paying capital gains tax in the UK until 5 April, at which point that threshold is likely to rise.
If you exceed that threshold, the amount you pay in capital gains tax depends on your income and the asset in question.
A basic-rate taxpayer, for example, who makes more than £12,000 from selling a non-property asset, pays 10% tax. Higher or additional-rate taxpayers in the same boat pay 20%.
This is where it gets complicated.
For residential property sales, an extra 8% surcharge applies regardless of which tax band you fall into. That applies to additional homes outside of your main residence, such as holiday homes or rental properties.
For assets taken out of or placed into trusts, a £6,000 threshold applies along with a standard tax rate of 20%.
Reliefs and exemptions
When you put your home up for sale, any profit you make is usually tax-free because of private residence relief.
However, this relief may be lost if you own more than one property or if you have rented it out during the time you owned it.
Letting relief can provide an exemption of up to £40,000 of any gain, if you rented out your home at some point before disposal.
If you’re selling a business you may qualify for the entrepreneurs’ relief. This potentially lowers the tax rate to 10% – up to a lifetime limit of £10m.
Holdover relief is available when you give away business assets or sell them for less than full value.
This shifts the liability to the gift’s recipient, who pays capital gains tax on disposal of the asset.
Placing investments in ISAs or pensions are also exempt from capital gains tax, while other reliefs or exemptions apply.
Capital gains tax in 2020/21
Three significant changes to capital gains tax are due to take effect from 6 April 2020, subject to legislation.
Firstly, letting relief will only be available if you share occupation of your house with a tenant at some point before you sell.
Secondly, when you sell your main home you usually qualify for 18 months of private residence relief. This exemption will halve to nine months.
Finally from April, if you sell residential property that is not your home you will need to report and pay any taxable profits within 30 days.
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