By Graham Poles, tax partner, Armstrong Watson
Capital Gains Tax (CGT) has been in the spotlight recently due to changes in the tax-free allowances as well as updates to the rates of taxation of certain assets.
Over the last couple of tax years, these changes have been drip-fed, however, looking at where these allowances were two years ago, the changes are quite dramatic.
In the 2022/2023 tax year, the Capital Gains tax-free exemption was roughly in line with the tax-free personal allowance at £12,300.
A year later, in 2023/2024, this allowance was more than halved to £6,000. In the current 2024/2025 tax year, this has been halved again to just £3,000 – a reduction of more than £9,000 in two years.
How does this impact your tax liability?
For a higher or additional rate taxpayer, the current tax rates for the disposal of assets are 24% on gains from residential property and 20% on gains from other chargeable assets.
HMRC reduced the tax rate on residential property from 28% to 24% (for higher and additional rate taxpayers) on April 6 2024 and, although this isn’t a huge reduction, it does give some reprieve to the reduction in tax-free exemption, particularly where the gain is significant and may result in a lower tax charge than in the tax year ended April 5 2023 (when the threshold was higher).
As there has been no change to the tax rate for other chargeable assets, the amount of CGT payable will increase in the 2024/2025 tax year, because of the falling tax rate.
Increased reporting requirements
While there may be slight tax savings for those selling residential property, HMRC does have more stringent reporting requirements for the sale of residential properties with their 60-day reporting regime.
For anyone disposing of a residential property, that is not their main home, the reduction in annual exemption to £3,000 will undoubtedly mean that more individuals are caught in the 60-day regime and will need to file and pay any tax due to HMRC within 60 days of sale completion.
If an individual does not normally complete a self-assessment tax return, then any residential gains reported through the 60-day reporting regime will not trigger the need to register for self-assessment.
On the other hand, for an individual disposing of other assets, there may be a requirement to report the gain via a self-assessment tax return.
If you are unsure as to whether your disposal will mean you have an obligation to complete a 60-day CGT report, or if it should be included on a self-assessment tax return, it is advisable to discuss your circumstances with a qualified accountant to ensure that there are no undisclosed gains to HMRC; this could result in penalties being issued.
Finally, as with all disposals of chargeable assets, there are potentially a number of tax saving reliefs (Business Asset Disposal Relief (BADR), Principle Private Residence Relief, etc) that can be applied depending on the asset and/or your individual circumstances.
For example, currently, if a property qualifies as a furnished holiday let (FHL), you could claim CGT BADR on the sale which would reduce the rate of CGT from 24% to 10%. On 6 April 2025 FHLs are due to be abolished which will increase the CGT on any property sale.
For advice and support around the changes to Capital Gains Tax and how they might impact your tax liability please get in touch. Call 01768 222030 or email [email protected].