Capital gains tax (CGT) is a financial topic that often leaves individuals scratching their heads, especially when it comes to navigating the intricate landscape of tax regulations.

Understanding the ins and outs of CGT is crucial for anyone buying, selling, or investing in assets or when planning your legacy.

This blog aims to shed light on the key aspects of capital gains tax, demystifying the complexities so that you are better informed when you are planning for the future and seek financial advice.

What is Capital Gains Tax?

Capital gains tax is a tax on the profit made when you sell or dispose of an asset that has increased in value.

Assets can include anything from property and investments to personal belongings worth over a certain amount. In the UK, CGT is applicable to individuals, trustees, and personal representatives, with rates varying depending on the type of asset and the taxpayer's income tax band.

Understanding the Basics

Current CGT rates are generally 10% for basic-rate taxpayers and 20% for higher and additional-rate taxpayers.

However, some assets, such as residential properties, attract higher rates. For the tax year 2023/24 these are 18% for basic rate taxpayers and 28% for higher rate taxpayers.

It's important to note that these rates and thresholds may be subject to change, and individuals are advised to check the latest updates on the government website or from their financial advisor.

Principal Residence Relief

One of the key considerations for many individuals is Principal Residence Relief, which can exempt a person from paying CGT on the sale of their main home. This relief applies if the property has been the individual's main residence throughout the ownership period, though certain conditions and timeframes must be met.

Hence, the vast majority of people will not pay CGT on the profits made from the sale of their main home.

For example, if you needed to sell your home in order to help pay for care home costs you would not have to pay CGT

It should be noted however that CGT would be paid on the profits made from the sale of a second property.

Annual Exempt Amount

Each individual in the UK is entitled to an annual exempt amount - a certain level of gains that can be made tax-free. For the 2023/24 tax year this amount stands at £6000, which means individuals can make £6000 profit on assets before the applicable rate kicks in.

Utilizing this allowance effectively can help reduce your overall CGT liability.

Impact of Inheritance

When you inherit assets, you usually do not have to pay CGT at the time of inheritance. Inheritance typically triggers a "no gain, no loss" treatment. This means that the base cost of the inherited assets for the person inheriting them is usually set at the market value at the time of the donor's death. This is known as the "probate value."

However, it's essential to note that if the property is sold at a future date and it has increased in value then CGT will be deducted from the profit.

The CGT liability would be calculated based on the difference between the sale proceeds and the probate value (market value at the time of death).

You must report and pay any CGT on most sales of UK property within 60 days.

It is also important to note that when you have inherited a property, you will be subject to Inheritance Tax (IHT) currently set at £175,000 per person or the value of the property if lower, but it should not be mistaken for CGT.

For a detailed explanation of IHT please see our blog, What is Inheritance Tax & Who Pays it?

Business Assets and Entrepreneurs' Relief

For those engaged in business, there are specific provisions such as Entrepreneurs' Relief (now known as Business Asset Disposal Relief). This relief offers a reduced rate of 10% on qualifying gains, providing a significant advantage for entrepreneurs and business owners.

Conclusion

Navigating the waters of capital gains tax requires a clear understanding of the rules and regulations governing the sale or disposal of assets.

Staying abreast of changes in rates, allowances, and reliefs is crucial to making informed financial decisions, optimizing tax efficiency and protecting your legacy when you pass away.

Whether you're a homeowner, investor, or business owner, a solid grasp of capital gains tax can help you navigate the complexities of the tax system and ensure you're not paying more than necessary.

As always, seeking professional advice is essential to ensure compliance with current regulations and to make the most of available reliefs and exemptions.

If you have any questions about capital gains tax or inheritance tax please ask one of the friendly advisors at Savigny Will Writers, who will be happy to guide you to the best source of expert advice.

For more information, please contact us using the details below.