Capital Gains Tax – it’s all about to change
Capital Gains Tax (CGT) is essentially a tax on profit on chargeable assets such as property and shares.
It can apply to gifts (when no cash changes hands), destruction (when insurance pays out) and sales of items.
In relation to property, if you sell your only or main residence, and buy another, you don’t pay CGT as you benefit from a relief known as Principal Private Residence Relief (PPR).
If you dispose of a property that isn’t your main home or that has stopped being your main home, you may have to pay CGT.
The calculation of the tax is based on the following:
Sale proceeds (or market value if gifted away) X
Less costs of sale [X]
Less purchase costs [X]
Less significant enhancement expenditure [X]
Less any costs of protective title etc (boundary disputes and such) [X]
Profit made: X
Less Annual Exemption [currently £12,300]
Taxable Profit X
The rates of tax are currently set at 10% and 18% (for those who pay basic rate income tax) or 20% and 28% (for higher rate income tax payers).
The 18% and 28% rates apply to residential property only, whilst all other chargeable disposals are charged at either 10% or 20% depending on the payer’s income tax position.
For residential properties, CGT must be paid within 30 days of the sale of the property.
What will change?
The rates of tax for CGT are particularly low and, with the Government having made promises in their manifesto that they won’t increase income tax or inheritance tax, we fully expect CGT and corporation tax to take the brunt of tax reform this year.
Corporation tax increases in a Brexit/Covid world are likely to be less attractive, as the Government will not wish to deter businesses from operating on our shores. So, consequently, we fear CGT will be radically reformed.
This is likely to be more significant when it comes to property.
In recent years we have already seen increases in stamp duty for those buying second properties and it’s clear the Government is keen to deter mass property ownership in order to free up properties for first time buyers.
For this reason, and as a deterrent to people purchasing second properties for profit, we believe that the Government will be considering making significant changes, including introducing a 40% or 45% rate for residential property sales.
We would expect such a change to be delayed, so as to give people time to sell their second properties that may already result in huge gains at the 28% rates. This could lead to a lot of properties suddenly becoming available for purchase.
Further, there have been suggestions that PPR could be removed entirely. This would make it significantly more difficult for people to move to bigger properties as a large part of the equity accrued in their property through natural growth will be subject to CGT. This could potentially lead to huge amounts of income for the treasury but, likewise, would make property a far less sound investment.
Other suggestions for reform under consideration include removing the annual exemption (although the impact of this may be minimal) and, in terms of business assets, removing or significantly further reducing entrepreneur’s relief.
If you are considering gifting or selling a property that isn’t your main home, it’s essential to take tax advice first. Please contact Michael Culver for a fixed fee consultation.