Many people often feel bewildered by the name Capital Gains Tax. Is it on every item? What if the value of my house increases? What do you pay CGT on if you’re selling your home? It is a concept that many think they need a chartered accountant to understand or tackle. But this is not the case at all.
Knowing how to avoid it is surprisingly simple, and can be understood by anyone willing to spend just a few minutes reading about it. To make things easier, we have put together the ultimate guide on Capital Gains Tax – what it is, how it works, and most importantly, how to avoid it!
With that in mind let’s go through some things to know about Capital Gains Tax:
What is Capital Gains Tax?
There isn’t much point looking into ways in which to avoid it before finding out what it is and if it applies to you. Put simply, it is a tax everyone in the UK must pay when they come to sell something, if that item has gone up in value since they bought / acquired it. There are obviously exceptions to this rule. Not all items are subject to this tax, and how much you have to pay also varies. But this is what the tax is for in a nutshell.
Capital Gains Tax (CGT) is only applicable to the increase in value of the item. So for example, let’s say you have a second home, which you bought for 50 thousand pounds a few years ago. Now, years later, the whole area has been regenerated and you’ve really looked after it meaning it’s value has sky rocketed to 90 thousand pounds! Lucky you! However, you are now going to have to pay CGT when you come to sell this property. The good news (ish) is that you only pay CGT on the difference between the value when you bought the house, and now when you come to sell it. So in our example, you bought at £50k, and you’re now selling at £90k. That’s a difference of 40 thousand pounds, which is the amount you’re required to pay tax on, NOT the total value of the house.
What does it apply to?
Capital Gains tax doesn’t apply to everything. However, there are certain items called “chargeable assets” that you do pay on. CGT applies to any gain made from:
most personal possessions worth £6,000 or more, apart from your car.
property that’s not your main home
your main home if you’ve let it out, used it for business or it’s very large
shares that are not in an ISA or PEP
If you are selling something that you share with someone else, then you have to pay tax on what your share of the gain is. For example, if you and you partner both own a second home. If you sell it for £10,000 profit, then you are each eligible to pay £5000. Also, depending on what the chargeable asset is, you can pay less by claiming a relief.
What are the exemptions to CGT?
There are certain things that are always exempt from CGT. If you make gains in your ISA or PEP account, this is exempt. Other exclusions are gains made from betting and lottery winnings, and also UK government gilts or Premium Bonds. If you’re looking into CGT tax because you’ve recently inherited an item, don’t worry. Inheritance tax will usually be covered by the estate of the deceased, and you only need to worry about CGT once you come to sell what you’ve inherited.
You will also only ever have to pay Capital Gains Tax on gains you make which are above your annual tax free allowance.
Donating to charities is also not covered by Capital Gains Tax. Lastly, CGT is not chargeable on gifts exchanged between married couples and civil partners.
How much do I have to pay?
Knowing how much you have to pay is where it can get tricky. Because this is evaluated on your yearly capital. So you will need to keep track of what profits you make and when. The tax year runs from the 6th of April each year, through to the 5th of the following year. Keeping records is essential if you want to keep things simple when working out your taxes when filling out your tax return. You will also need to keep these records from between one year and 18 months in case HMRC has any queries to come back to you with. If you are filing as a business you will need to keep these records for 5 years before destroying them.
The amount that you have to pay varies from person to person, year to year. One thing that will affect how much you pay is how much you earn per year. If you earn enough per year to be a higher rate taxpayer, you are liable for 28% on your gains. However a basic rate taxpayer is only liable for 18%. Also, everyone has a tax free allowance that they can go up to each year without having to pay any CGT.
You only have to pay once you go over your personal threshold. Everyone’s yearly tax relief allowance is £11,700 or £5,850 for trusts. This means any profits made under those thresholds are tax free! It also means that you can deduct losses or claim reliefs against your profit. If after you deduct your losses you are below your yearly allowance, you won’t have to pay any CGT.
What are you options?
Now that we know more about what it is, and what it’s for, we can start talking about ways you can avoid having to pay it.
Find ways of reducing your annual net gains to avoid paying the higher 28% bracket.
Avoid capital gains taxes by lowering your taxable income and save up to £1,195 in income tax by swapping some of your salary for childcare vouchers.
Reduce the amount payable by investing your gains into schemes, funding programs, or gifting to charity.
If you’ve had large gains one year, but not the previous year, average out your income by combining both years together. This means your average for the higher gain year will be lower.
Claim losses going back as far as 4 years against your gains for the current tax year.
- You don’t pay CGT on gifts to partners. So if you have a partner, and they are below the tax threshold, gift assets to them will mean those items are no longer eligible for Capital Gains Tax.
- Invest gains you make into an ISA. Savings in ISA accounts are protected from CGT and will also gain you interest.
Contact us for free and avoid Capital Gains Tax
Knowing all about taxes and what they cover is just one of the many services our property experts offer. If you have a second property you want to sell, don’t waste time and money on estate agents. Go with a safe bet like ourselves, we’ve helped hundreds of people sell their homes without fees or fuss. Take the easy route with UK PCB today and find out just how easy it is to get a fair price for your home. You could have your property sold in as little as 7 days with out fast sale service. You can avoid paying cgt by selling before the time comes to declare to HMRC. This will save you time, stress and money. Contact us today and speak to a property expert for free. There are no fees, no catches, and no obligations to sell. Let UK PCB and our panel of property experts help you today!