Capital Gains Tax
So, what is Capital Gains Tax? Ian Lowes of North East independent financial advisers Lowes Financial Management explains. ‘Capital Gains Tax is a tax on profits you make from selling something you own.’ Like the name suggests, it occurs when selling something you own gains you a profit. It’s important to remember though, that the tax is calculated on the actual profit that you make, and not the amount you sold it for. A good example is if were to buy a sculpture for £5,000, and sold that sculpture on for £20,000, you made a gain of £15,000 as you subtract the amount that you originally paid for the sculpture.
Capital Gains Tax, therefore, is essentially a tax on any profit you made on the disposal of an asset, and it applies to the vast majority of assets when they’re sold. ‘It’s typically charged on profits from selling investments, or second properties and gifting assets,’ Ian explains. There are, of course, some exceptions, the most common being gains arising from selling your home, or car and investment gains within an ISA or pension. Personal possessions sold for £6,000 or under are exempt from Capital Gains Tax, and it’s important to note that you don’t pay Capital Gains Tax when you sell your car, unless you use it for business.
What some people may not know, is that Capital Gains Tax is also applied to assets that are received as gifts from other people – though not usually your spouse or civil partner. A valuation needs to be made of how much the asset is valued at when gifted, and if a capital gain transpires if or when you dispose of the asset, then the tax is applied (tax relief is available for gifts).
Inheriting an asset is different to receiving an asset as a gift – in this situation, you won’t have to pay Capital Gains Tax unless you decide to sell it. You will, however, need to know how much the inherited asset was valued at the time, so that you can calculate and, if necessary, report the gain on your tax return. Keeping a record of these assets is a good idea, so that if you ever do decide to sell, then you’ll already have all of the neccessary information.
The Annual Exempt Amount
If you’re interested in knowing how much profit you could make in terms of ‘gain’ before having to pay Capital Gains Tax, for the tax year 2018/19, you would have been exempt from having to pay the tax on the sale of any assets, if the profits made were less than £11,700. For the 2019/20 tax year, the tax-free amount is £12,000. This is known as the annual tax-free allowance or the Annual Exempt Amount.
It is possible to reduce your tax bill by deducting losses. You can report losses on a chargeable asset to HMRC, to reduce your total taxable gains – these are called allowable losses. The amount that you report is deducted from the gains that you made in the same tax year. You don’t have to report losses straight away either – you can claim up to four years after the end of the tax year in which you disposed of the asset.
Changes to Capital Gains Tax
The government are planning to implement some big changes that are coming in April this year however, specifically regarding lettings relief and Principle Private Residence (PPR), and Patricia Arnold of Patricia J Arnold & Co, a chartered accountancy firm in the North East, explains the impact of these changes. ‘The majority of property-owners do not pay Capital Gains Tax when they sell their main home because of a tax relief which exempts the seller from tax in relation to periods when they lived in the property, and including certain periods of absence. From April 2020 this relief is being reduced in two ways: the final period exemption is being reduced from 18 months to 9 months,’ which, as a result, means that anyone set on moving will need to stay in their home until it is officially sold, or ensure that the sale of their old property occurs within nine months of them moving out, to avoid a potential Capital Gains Tax charge.
‘And the lettings relief,’ Patricia explains. ‘Which is currently worth up to £80,000 per couple, will only apply in future where there is joint occupation. This will effectively abolish the relief in most cases.’ From April 6 this year, lettings relief will be reformed, meaning that it will only apply where an owner is in shared occupation with their tenant.
‘Where tax is payable,’ PJ Arnold say, ‘A new Capital Gains Tax return has to be filed with HMRC within 30 days of completion, and instead of the tax being payable by 31 January after the end of the tax year, the tax has to be paid within 30 days of completion.’ From 6 April onwards, when anyone sells a residential property, rather than waiting to tell HMRC in the tax return for that tax year, they now must complete an online return within 30 days and pay any capital gains tax due. The way that it currently works is that if the sale of a buy-to-let property is completed on or before April 5th 2020, the taxpayer would need to tell HMRC in their 2019/20 tax return, which must be submitted by 31 January 2021 and any Capital Gains Tax due paid by the same date.
But, after the new rules come into play on April 6, If instead the sale of that same property was completed on April 10th 2020, for example, the online return must be submitted and any tax paid by May 10th 2020. That’s eight and half months earlier than before, meaning you will have to pay your tax much sooner. ‘All residential property owners thinking of putting their property up for sale or already on the market need to seek professional advice now, to understand how the new rules will affect them,’ advises PJ Arnold. ‘A delay in a sale at the beginning of April 2020 could cost you thousands – many more people will pay Capital Gains Tax and even more will need to work out their position.’