Capital Gains Tax receipts hit £9.2billion in 2021/22 and according to analysis of Office for Budget Responsibility (OBR) data, this figure will rise over the coming years. A “sharp increase” to £13billion is predicted for 2022/23 and by 2026/27, nearly £20billion will be paid by taxpayers.
Rishi Sunak’s Budget
In the run up to the Budget, many expected CGT to be targeted by Rishi Sunak in an attempt to cover coronavirus costs. However, Sean McCann, Chartered Financial Planner at NFU Mutual, noted the OBR forecasts may have forced the Chancellor to think twice on making changes.
“Despite concerns that Capital Gains Tax would be radically overhauled with higher rates to help repair the public finances, Rishi Sunak left it relatively untouched in his Budget,” he said.
“These forecasts – which suggest CGT receipts will more than double in five years – may have prompted the Chancellor to leave the tax alone.
“The projected increase is based on anticipated rises in equity prices in the coming years as the world bounces back from the Covid pandemic.
“This, combined with the impact of changes to Entrepreneurs’ relief in March 2020, which slashed the lifetime limit from £10million to £1million for those disposing of qualifying businesses, may have influenced the Chancellor’s decision.”
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Residential Property changes
While Mr Sunak did leave CGT relatively unchanged, he did make one small alteration in the Budget. Going forward the time needed to report and pay tax due on gains from residential property has doubled from 30 days to 60 days.
This extension came just over a year after the deadline was slashed to 30 days. Previously, the deadline was January 31 following the end of the tax year.
Mr McCann continued: “This is a welcome change which gives people more time to pay the tax after selling or gifting residential property such as holiday homes or rental property.”
On top of property, there are many assets which CGT is paid on. CGT itself is a tax on the profit made when a person sells an asset that has increased in value.
CGT is paid on personal possessions worth £6,000 or more, apart from a car. It is also paid on shares which are not held in an ISA or PEP and certain business assets.
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How to reduce a CGT bill
Mr McCann shared guidance on how people can reduce their CGT bills. He noted gifts between spouses or civil partners can be made free of CGT. By transferring ownership of part of the asset they’re disposing of – whether that’s shares or property – to a spouse or civil partner, they can use two tax free annual exemptions of £12,300, which means the first £24,600 of any gain will be tax free.
Similarly, if a spouse or civil partner will pay a lower rate of CGT because they are not higher rate income tax payers, it can be beneficial to give them a larger share of the asset before the sale so that as a family they pay a lower amount of tax.
As everyone also has a £12,300 annual tax-free CGT exemption, it can make sense to stagger disposals across more than one tax year. If selling shares or investment funds, it may be possible for spouses or civil partners to realise £24,600 of tax-free gains before April 5 and a further £24,600 from April 6, giving a total tax-free gain of £49,200.
Where CGT is due, it is levied at different rates which are dependent on the type of asset involved.
CGT rates
People will pay a different rate of tax on gains from residential property than they do on other assets. Higher or additional rate taxpayers will pay 28 percent on gains from a residential property.
For other chargeable assets, 20 percent will be levied on the gains.
Basic rate taxpayers will have their CGT based on the specific size of their gain, their taxable income and whether their gain is from residential property or other assets.
This will follow a specific calculation where initially, a person will need to work out how much taxable income they have – which is their income minus their Personal Allowance and any other Income Tax reliefs they’re entitled to.
They’ll then need to work out their total taxable gains, deduct their tax-free allowance from this figure and add the result to their taxable income.
If this amount is within the basic Income Tax band they’ll pay 10 percent on their gains (or 18 percent on residential property). They’ll pay 20 percent (or 28 percent on residential property) on any amount above the basic tax rate.
Reporting a loss
Taxpayers may also be able to report losses they’ve made on chargeable assets to HMRC which could reduce their total taxable gains. Losses used in this way are called allowable losses and can lower how much CGT is paid.
When a person reports a loss, the amount is deducted from the gains they made in the same tax year.
If their total taxable gain is still above the tax-free allowance, they can deduct unused losses from previous tax years. If they reduce a gain to the tax-free allowance, they can carry forward the remaining losses to a future tax year.
To report losses, people can claim for their loss by including them on a tax return. If they’ve never made a gain and are not registered for Self Assessment, they can write to HMRC instead.
Taxpayers do not have to report losses straight away, they can claim up to four years after the end of the tax year that they disposed of the asset.
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