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Capital Gains Tax (CGT) is a tax on the profits from selling assets, such as shares, property, and investments. CGT was introduced in the UK in 1965 by Labour Chancellor James Callaghan. The rates of CGT have changed over time. Initially, the personal tax rates were relatively low, with a flat rate of 30% applied to all capital gains. However, this approach was later revised to introduce a tiered system that differentiated between short-term and long-term gains.
For residential property, the top rate of CGT was 30%. In 1988, it was increased to 40%, the same as the top income tax rate. In 2008, CGT was reduced to 18% and in 2010, a new rate of 28% was introduced for higher-rate taxpayers.
For other investments, i.e., stocks and shares, separate rates were introduced in 2020.
- Basic rate taxpayers: 10% if the gain is within the basic rate band, 20% if the gain is above the basic rate band.
- Higher-rate taxpayers: 18% if the gain is within the higher rate band, 28% if the gain is above the higher rate band.
- Additional-rate taxpayers: 28%.
Declaring CGT on UK residential property
If you sell a UK residential property, you may have to pay CGT on the gain. The amount of CGT you have to pay depends on the amount of the gain, your income tax band, and how long you have held the property.
To file CGT returns for UK residential property, a new platform was introduced in April 2022. It is a digital platform that allows taxpayers to report their CGT gains on property. The platform is designed to be more user-friendly than the previous systems and allows taxpayers to submit their returns online.
Declaring CGT on other Assets
Other Assets include shares, stocks, non-UK residential properties, commercial properties, crypto gains, and any other gains not defined in HMRC Guidance.
You would need to file a Self Assessment Tax Return and add SA108 to declare Capital Gains from the sale of assets. If you have only to file a Self Assessment Tax Return to declare CGT and otherwise you do not need to fill it, it’s necessary that you must let HMRC know that you do not need to file a tax return for next year. This will stop HMRC from issuing you a notice to file tax returns in future years.
Upcoming Changes and How to Reduce Capital Gains Tax
The UK government has announced that the annual exempt amount (AEA) for capital gains tax (CGT) will be reduced from £6,000 in 2023/24 to £3,000 in 2024/25 and subsequent tax years. This means that individuals will only be able to earn £3,000 of capital gains each year before they start to pay CGT. The reduction in the AEA will mean that more people will be liable to pay CGT. It is estimated that around 500,000 individuals and trusts will be affected in the first year of the change.
Review your portfolio if you have significant capital gains or plan to pass them on through inheritance. Changes to CGT liability may affect you, especially if you’re a higher or additional rate taxpayer. Consider selling assets sooner or more this tax year to lessen the impact.
Think about the CGT allowance.
Staggering the disposal of assets to capitalise on your current CGT allowance of £12,300 will be far less fruitful. March 2023 is the last opportunity to capitalise on the current personal allowance of £12,300 before it is reduced.
Selling a property or business
If capital gains tax rates align with income tax, the tax liability of selling a business or property that is not a primary residence will be considerably higher. Speak to our Tax Advisors if you plan to make a large asset disposal on which there will be capital gains to pay, as it may be appropriate to bring the sale forward.
Spousal Transfers
Sharing assets with a spouse or civil partner before sale to take advantage of each person’s allowance could become less effective if the allowance drops significantly. However, transferring assets in this way may still be worthwhile if the recipient pays a lower income tax rate, as this could mean the rate of CGT they pay upon their disposal may be lower.
Donate to charity
If CGT is aligned with income tax, the incentive to utilise assets for charitable donations is markedly larger. Not only does one not pay CGT when donating land, property or shares to charity, but the value of the donation can also be offset against one’s total taxable income. This could reduce an income tax bill.
Make the most of your pension and ISA.
Assets held in a pension or ISA are free of CGT; therefore, it pays to have as much as possible saved in tax-efficient investments as possible. Making pension contributions will also expand one’s, basic rate band. If the expanded basic rate band means you drop down a tax band, it will be possible to take some gains and only pay a lower rate of CGT.
Transfer assets earlier
A potential removal of the CGT uplift means recipients of assets via inheritance must pay CGT and IHT. Transferring assets before death may allow the recipient to avoid inheritance tax. This is a complex area, and you should take further advice if this concerns you.
Brought Forward Losses
Those with significant losses carried forward could consider using them now if the ability to do this is removed. However, the ability to carry forward losses could become even more valuable if the proposed changes are made.
Consider Investment Bonds
Life assurance investment bonds offer tax advantages that could be much more valuable if the proposed changes are implemented. Investment Bonds are not subject to CGT, and the ongoing taxation can be deferred to a future date or mitigated by assigning segments to lower or non-taxpayers.
If you need help with CGT compliance call our office to talk to one of our Tax Specialists.