Capital Gains Tax Explained
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When inheriting an asset from another person, the UK government may require you to pay tax. The primary example of this is inheritance tax – however, if you inherit an asset that subsequently increases in value, you’ll also be required to pay Capital Gains Tax (CGT).

What is Capital Gains Tax?

Capital Gains Tax (CGT) must be paid on items that are sold on a substantial profit. Antiques, shares, precious metals and second homes could all be subject to the tax if you make enough money from them.

When do you have to pay CGT?

Capital Gains Tax is only due if you make a certain amount of profit from the sale of your possessions in any given tax year.

The level of tax-free profit you can make each year is determined by the government. You only pay Capital Gains Tax on the amount you exceed this figure by. In most cases, your profit equals the amount you sold your item for, minus the amount it was bought for.

The rate of tax you pay depends on how much income you earn annually, and the size of your gain. There is more detail on these variables in the section below.

Capital Gains Tax and property

In most instances, when you sell the property that you live in as your permanent residence, you do not have to pay Capital Gains Tax. However, there are certain situations where you may be required to, such as if you have sub-let part of it, if you are using the property as business premises, if you have another property which could be viewed as your main residence, or if the house includes lots of land/additional buildings.

Capital gains tax is charged at 18% for low rate taxpayers and 28% for higher rate taxpayers. In 2020/21, everyone has an annual tax free allowance of £12,570. This means that anyone with an income over £50,000 would pay CGT at 28%, while anyone with an income below this figure would pay it at 18%.

For example, if a property increased in value from £300,000 to £400,000, £100,000 minus the tax-free allowance of £12,570 would be subject to CGT. That leaves £87,430. If you earn £25,000 a year you would pay 18% on the first £25,000 and 28% on the next £62,430, which amounts to £21,980.40.

Capital Gains Tax and foreign property

Just like property located in the UK, you do not have to pay CGT on a foreign property if it is your primary residence. You will have to declare that your property is your main residence, in order to avoid tax in this way, within two years of purchasing the foreign property.

There have been some reports of difficulty, however, when people have attempted selling both a UK and foreign property within the same tax year. If you are planning on doing this, you should consult an accountant before proceeding to see how you can sell your properties in the most tax efficient way.

How to reduce Capital Gains Tax

You can often avoid capital gains tax altogether if the property you are selling is your “Principal Private Residence” – or, in simpler terms, the property you live at.

Besides this, there are other ways you can reduce the capital gains tax you pay.

Firstly, you can reduce capital gains tax is by offsetting your losses against your profits. This means that if you have made any losses when selling other assets in the same tax year, you can deduct these from your total profits, and therefore reduce the amount of capital gains tax you pay. You could also deduct other costs from your profits, such as conveyancing fees and estate agency fees.

Secondly, you can reduce capital gains tax by making use of the £12,570 tax-free allowance (mentioned previously in this blog). A spouse will also have this same allowance – which means that, by combining your two allowances together, you can increase the tax-free sum to £25,140.

You may also wish to consider delaying the sale of a property, if it will help to reduce the capital gains tax you pay. For example, if you have already used up your CGT allowance in the current tax year, it often makes sense to wait until the next tax year begins before selling your property, so you can access the allowance.

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