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Capital Gains Tax: How Much Is It?
Capital gains tax is imposed on the sale of an asset that has increased in value. The tax applies to the profit that has been made and not the full amount that you receive from the sale. Some belongings are tax free and if the amount of profit does not exceed your tax free allowance for the relevant tax year you will not pay capital gains tax.
If you are getting rid of an asset that could be subject to the tax, it is important to remember that this is not limited to selling it. Giving away a property as a gift or transferring the title to someone else’s name is still classed as disposal. In addition, if you swap one asset for something else it could still be subject to the tax. Below you can find more information about capital gains tax and how it can affect your finances.
Capital Gains Tax on Property
Capital gains tax is payable if you sell a second home or a buy-to-let property. It is not normally applicable when you sell your main residence. However, under circumstances where you have been using part of your home for business purposes or have leased out part of the property CGT may apply.
The rates of capital gains tax are different for property than for other assets. Additionally, rates will vary depending upon whether you are a basic rate tax payer or fall into the higher tax rate band. Everyone who pays tax has an annual allowance for CGT. If you are charged capital gains tax on the sale of a property, the bill must be paid within 30 days of the completion date.
Capital Gains Tax FAQ
Is Capital Gains Tax Payable On Gifts?
Capital Gains Tax is not payable on gifts to a spouse or civil partner unless you were separated and not living together during the tax year. If you gifted assets for a business to be sold on, CGT will be payable. A gift that is sold later may be liable for CGT on the profit.
How Do I Report And Pay Capital Gains Tax?
Reporting for Capital Gains Tax involves calculating the profit on any asset that has been disposed of. You must give details of the asset and the dates when it was bought and sold on. When you have sent in the tax return HMRC will contact you with details of the amount and date the payment is due.
What Are Capital Gains Tax Rates On Property?
Basic rate taxpayers are charged 18% on the profits from property that has been sold. Higher rate taxpayers pay a rate of 28% on profits from a property sale. There is a tax free allowance for the first £12,300 of profit in the 2020/21 tax year.
Assets That Attract Capital Gains Tax
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Capital Gains Tax was introduced in 1965 and was originally charged at a flat rate of 30%. All assets acquired since then may be subject to the tax. There is no CGT due on items that have a limited lifespan of less than 50 years. This can be applied to assets like clocks, watches and some antiques. Assets that are charged CGT include the following
- A property that is not a main residence or an investment property
- Personal possessions worth more than £6,000 including jewellery, art and antiques
- A main residence that is let out for business purposes
- Business assets such as land and buildings, fixtures and fittings and machinery
- Shares that are not held in an ISA or PEP
Capital Gains Tax Allowances
Everyone who is employed has a tax free allowance and in the 2020 tax year it is £12,300. You are entitled to have this amount of profit from selling an asset before any tax is payable. An asset that is owned jointly with another person effectively doubles the amount of profit that is tax free.
Spouses and civil partners can transfer assets without attracting capital gains tax. The caveat here is that if you transfer an asset to a partner and then it is sold, you can be charged on the profit made during the time that the asset was owned jointly. It is not possible to carry over a capital gains tax allowance from one tax year to the next. There is no CGT on the sale of a vehicle.
This article is for guidance only. Please check with HMRC or your financial advisor to find out if you are liable for capital gains tax on your property or assets.
Can I Avoid Capital Gains Tax?
There are a few scenarios where capital gains tax is not applicable. Profit made from selling your main residence is not subject to CGT but there are still certain criteria that apply. The property must have been used as your main residence for the whole of the period that you have lived there. It must be your only home. The property must not have been rented out to tenants or lodgers and you must not have run a business from there.
One possible problem that could arise if you have worked from home is when you have declared your house as your business address. Under these circumstances HMRC may require CGT to be paid. Any property that is over 5000 square metres may be subject to the tax.
Inherited property that is sold immediately is not normally subject to CGT but if there is a delay and the value of the property has increased substantially there may be CGT on the extra profit. Finally, owners who have purchased a house with the intention of renovating and reselling quickly for a profit i.e. flipping houses, will find that the profit on the property is probably subject to capital gains tax.
Capital Gains Tax Rates
Each tax year runs from 6 April to the following 5 April. Any taxable gains made during that period must be reported if they are above your taxable allowance. If the tax is not paid within the allotted timescale a penalty and interest may be added to the bill.
Rates of CGT are different depending on the assets you have sold and depending upon which income tax bracket is applicable. Basic rate taxpayers will be charged 18% on the profit from the sale of a property (not main residence) and 10% on the profits from other assets.
Higher rate taxpayers pay 28% on profit from selling a property and 20% from the sale of other assets. You can find online calculators that will help you to assess how much capital gains tax is due.
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