How does capital gains tax work? When do you have to pay and what are the CGT rates and allowances for second home owners, landlords and investors?
Capital gains tax is levied on gains from assets ranging from stocks to second homes, purchased properties and personal possessions.
Traditionally it has been levied at lower rates than income tax because the assets in question tend to be those on which people take risk – whether entrepreneurially or through investments outside of income and pension insurance.
Income from work and savings interest are more secure and are therefore taxed differently and more heavily.
Capital gains tax is levied on assets ranging from stocks to second homes, purchased properties and personal property
Your main residence where you live, your main private residence, is exempt from capital tax. This, and an annual tax allowance that stood at £12,300 until April last year, has meant that corporation tax tends to fall on wealthier taxpayers.
However, the government’s radical cuts to the CGT allowance make it inevitable that many more people will have to pay it in the future.
How does capital gains tax work?
When you sell an asset, capital gains tax is charged on the gains – at the price at which it is sold, less what you paid for it or what the asset was worth when you acquired it.
There are tax reliefs depending on the asset and each person has a capital gains tax allowance, currently £6,000, to offset against their profits.
Do you have a tax question?
Heather Rogers, founder and owner of Aston Accountancy, is This is Money’s tax columnist.
She can answer your questions on any tax topic – tax laws, inheritance tax, income tax, capital gains tax and much more.
You can write to Heather at firstname.lastname@example.org.
But the CGT tax allowance will be cut again to £3,000 in April 2024.
“If an asset was transferred to you as a gift, the transfer value is the acquisition value,” says Heather Rogers, tax expert at This is Money.
“If the asset is bequeathed to you through a will, the estate value will be the value at which you are presumed to have acquired it.”
Rogers adds: “Where appropriate, you can deduct acquisition and disposal costs – for example, brokerage and legal fees on the sale.” You can deduct costs even if you have spent money and added value to the asset.
As far as CGT rates are concerned, if you are a higher or additional rate taxpayer (40% and 45% respectively), the CGT rate is 28 percent for gains from residential property and 20 percent for gains from other taxable assets.
For basic rate taxpayers (20 per cent): If your chargeable gain plus your total taxable income falls within the basic income tax band of £12,571 to £50,270, the CGT rate is 18 per cent for residential property and 10 per cent for other gains.
For a higher amount, the CGT rate is 28 percent for residential property and 20 percent for other gains.
Further information on CGT rates can be found here.
Here, Rogers explains how to carry forward capital losses to offset capital gains.
HEATHER ROGERS answers your tax questions
And it examines which types of personal property, referred to in this context as “movable property”, are subject to capital tax and which are exempt from tax here.
What do buy-to-let landlords need to know about CGT?
If you want to sell your purchase property, capital gains tax is due on the profit.
It applies to all properties that are not your primary residence – your main private residence – including private second homes.
Corporation tax is charged at the rates explained above, but as profits are added to income to give a total, in practice this means that most landlords making reasonable profits should pay the 28 per cent rate.
There are two benefits you can get on your CGT bill, but both are less generous than they used to be.
Firstly, there is a capital gains tax regime specifically for “accidental” landlords who have lived in a property once before renting it out.
If a landlord rents out a property that was formerly his or her primary residence, capital gains tax only applies to the amount by which the value of the property increased while he or she was not living there.
Landlords can also extend the amount of time they have spent in the property for a further nine months – this is known as the ‘end period exemption’.
An example of how this works would be a landlord who has owned their property for 10 years and lived in it for two years Seven years and three months of capital gains are taxed – the ten years, less the two years of residency plus the reduced nine month relief.
Another important CGT allowance to consider is “rental relief”.
If a landlord sells their former home after renting it out, up to £40,000 of their profits can be exempt from capital gains tax – but this now only applies if they lived in the property with their tenants.
In the meantime, you can reduce your CGT bill by deducting some of the costs associated with buying and managing a property.
You may also be able to offset losses from other properties against your capital gains tax bill.