Karen Valentine - Scottish Law Accountant
Recent changes by H.M. Revenue & Customs (HMRC) in relation to the Capital Gains Tax tax-free allowance are having an impact on taxpayers.
In very basic terms, when you dispose of an asset you need to ascertain whether or not you have made a gain, and check whether Capital Gains Tax (CGT) is payable. You may be able to carry forward certain losses, but we’re just looking at gains for now.
For most people the only asset they would sell or transfer is the house they live in and, for the most part, CGT isn’t a consideration as Private Residence Relief applies.
However, you do have to consider the position if it’s a second home, which you’ve either purchased or inherited, or if the property is being sold as part of an Estate. The sale of most types of shares are a disposal for CGT, although some are exempt.
Every taxpayer in the UK is entitled to a CGT tax-free allowance. Prior to 6th April 2023, that allowance was £12,300 which meant that you had to make a gain in excess of this amount before CGT was payable. To clarify, it’s the gain that’s taxable not the sale proceeds. It’s probably best explained by a simple example: you purchase a second home for £150,000 and sell it a few years later prior to 6th April 2023 for £162,000. This is a gain of £12,000. You can offset the tax-free allowance of £12,300 which would mean that your gain was within the tax-free allowance, no CGT would be payable, and you would have £300 remaining that year to use against another disposal. There are expenses, etc. you can claim but this is basically the calculation.
However, from 6th April 2023, HMRC reduced the tax-free allowance to £6,000 which in the above example would mean a taxable gain of £6,000.
The position changes again from 6th April 2024 when the tax-free allowance further reduces to £3,000. Again, in the example mentioned that taxable gain would be £9,000.
If you are dealing with a Trust, (unless it’s for a disabled person) the tax-free allowance is one half of that allowance i.e., £3,000 for 2023-24 and £1,500 for 2024-25.
In relation to Estates, HMRC allow the Executors to ‘appropriate’ assets to the beneficiaries, assuming that they have their tax-free allowance available, which is a transfer of the beneficial (and not legal) title. This would allow the Executors to sell on behalf of the beneficiaries without the inconvenience or transferring the legal title to them first.
As the tax-free allowance reduces, more and more taxpayers will find that they have a CGT liability on fairly minimal gains.
As of 27th October 2021, in relation to the sale of a residential property, HMRC require that you report and pay CGT within 60 days of the completion date. You can make an online submission, but they also allow paper submission. If you are non-resident, you must report all sales of UK property or land (residential and non-residential) even if you have no tax to pay. Please be aware that the relevant date in connection with property disposals is conclusion of missives, and not the day when you actually receive the sale price. This can be very important if you are disposing of the asset around the end of the tax year.
Any other disposals can be reported through your Self Assessment Tax Return or HMRC’s ‘real time’ Capital Gains Tax Services which can be found on their website.
There are various tax rates for CGT and this depends on the asset disposed of and whether or not you are a higher or basic rate tax payer. The tax rate can range from 10% to 28%.
CGT can also arise on the sale of other assets, and there are useful links on HMRC website, but this link might be the place to start!
This is not designed to be, and cannot be, a definitive explanation of CGT but hopefully it will give an insight into the current situation. CGT is a complex tax and we would always advise you to seek bespoke detailed advice from your solicitor or accountant.