Capital Gains Tax (CGT) comes into effect when you sell or dispose of an asset, such as property, stocks and some possessions, including antiques and jewellery. Property is the most commonly ‘disposed of’ asset people must pay CGT on.
Changes to CGT allowances came into effect in April 2023, changing the tax landscape for those disposing of assets, including second homes or investment properties.
The tax is calculated on the difference between the asset’s acquisition cost and its value upon disposal, and certain allowable expenses can be deducted from the taxable amount. Let’s explore 2023’s changes to the CGT allowance.
CGT is a levy on the profit from the sale or ‘disposal’ of an asset that has appreciated in value.
For instance, if an antique initially bought for £10,000 is later sold for £50,000, the ‘gain’ is £40,000 (£50,000 minus £10,000).
This ‘asset’ could include personal possessions, a second home, or shares outside an ISA.
CGT is a significant consideration for landlords, property investors or anyone selling a second home or other property.
A higher-rate taxpayer will be charged 28% on any gains from residential property. Basic taxpayers will face varying rates depending on the gain: 18% on residential property within the basic income tax band or 28% if it’s higher.
Changes in CGT allowance
In the 2022/23 tax year, the Annual Exemption Allowance (AEA) for CGT was £12,300.
This allowed individuals to make capital gains up to this amount within a tax year before paying CGT.
However, from April 2023, the CGT allowance was reduced to £6,000, a considerable decrease for those disposing of lower-value chargeable assets.
If you share the ownership of a property or other asset with another person, then you’re exempt from paying tax on the first £6,000 of your own share.
This reduction is part of a two-stage adjustment that will decrease the AEA to £3,000 in April 2024.
Implications of the changes
The government estimates that the changes have affected around 500,000 individuals and trusts in the 2023/24 tax year. This figure is expected to rise to 570,000 in the 2024/25 tax year.
Further, it’s anticipated that by the 2024/25 tax year, an additional 260,000 individuals and Trusts may become liable for CGT, who otherwise would not have been affected if these changes had not been implemented.
Impacts on property owners
The CGT change’s impact on those selling property is considerable but is worst-felt for lower-value assets that are now more likely to incur CGT.
Here’s an example of how the changes affect property sales. Should a homeowner buy a property for £250,000 and sell it for £300,000, the ‘gain’ amounts to £50,000.
Under previous rules, the taxable income from that property would be £37,700 (£50,000 minus £12,300 = £37,700), resulting in a CGT payment of £6,786 for a basic rate taxpayer.
However, for the same property in the subsequent tax year, the taxable income would increase to £44,000, causing the CGT bill to rise to £7,920.
Should you aim to sell before April 2024?
The CGT allowance will be slashed again in 2024, from £6,000 to just £3,000.
This is a major change for those selling lower-value assets, as any capital gains over just £3,000 will need to be reported to HMRC and tax paid.
This won’t just financially impact investors and those selling lower-value assets; it’ll also create an accounting headache for anyone disposing of assets with gains exceeding £3,000.
Continuity in CGT rules
Despite these changes, certain aspects of CGT remain the same. For instance, ISAs remain unaffected, and Private Residence Relief (PRR) on main properties still applies.
Moreover, even if CGT is not payable, any gain of at least £50,000 must be reported to HMRC.
Navigating the changes
These recent changes to the CGT allowances have significant implications for property owners in the UK. As such, it’s essential to understand these changes and plan accordingly.
If you’re unsure how these changes might affect you, consider seeking advice from a tax professional or accountant.
Speak to us about the impact CGT changes will have on you.