Capital Gains Tax: A Rising Concern

In the 2021/22 tax year, a staggering 400,000 Britons had to pay Capital Gains Tax, which is double the number from a decade ago. They forked out a hefty total of £16.7 billion. But what’s the fuss about?

Capital Gains Tax is levied on the profits you make when you sell assets like a second home, investment properties, businesses, precious items like antiques and jewellery, digital currencies, or shares and investment funds not protected within a tax-free Isa wrapper.

It’s worth noting that selling your main home is exempt from this tax.

Basic rate taxpayers currently face a 10% CGT, which climbs to 18% for property sales. For higher rate taxpayers, it’s 20%, or 28% for property sales.

What’s Changing with CGT?

Laith Khalaf, the head of investment analysis at AJ Bell, has raised a red flag about the potential surge in CGT bills. The concern arises from the Chancellor Jeremy Hunt’s decision to reduce the annual exempt amount — this is the profit you can make each year before facing a tax bill.

Previously, this exemption was at £12,300. It took a hit on April 6 this year, dropping to £6,000. And there’s another cut coming; it will plummet further to £3,000 by April 6, 2024.

To put this into perspective, we now shell out over double on CGT compared to inheritance tax, which stands at £7 billion annually.

The Expanding CGT Net

Although often regarded as a tax for the affluent, Khalaf suggests that more and more average Britons are getting ensnared in the CGT net. Even those with a moderate number of shares or investments outside of a tax-free Isa could find themselves facing an unexpected tax bill.

However, with some savvy planning, many might avoid this tax by taking only minor gains yearly, ensuring they remain within the annual exemption.

This year might be an especially opportune time to strategise, given the impending reduction of the exemption to £3,000 in 2024.

Some tactics that investors often employ include selling shares and then repurchasing them within a tax-free Isa. This is colloquially known as ‘Bed & Isa’. Additionally, married couples and civil partners can move assets between each other without incurring CGT, allowing them to optimise both their exemptions.

The Landlord Exodus

According to Rachael Griffin, a tax and financial planning expert at Quilter, the spike in CGT revenue for HMRC is in part due to an increasing number of landlords offloading their properties. Stringent tax laws have made buy-to-let properties less appealing.

Data shows that in the 2022/23 tax year, 139,000 individuals declared 151,000 property sales, resulting in tax liabilities of £1.8 billion — an average of almost £12,000 per property.

Many expect the rate at which landlords sell properties to pick up, given the potential threats of rising borrowing costs and prospective dips in house prices.

Silver Linings for Landlords

While the landscape might look tough for landlords, there are still some ways to soften the blow. They can use the annual exemption and offset several costs against the final tax bill. These include:

  • Estate agent and solicitor fees
  • Stamp duty from the initial property purchase
  • Surveying and valuation costs
  • Expenses related to property enhancement like building a conservatory or renovating kitchens.

Remember, it’s essential to retain all receipts for these transactions. Costs related to routine maintenance, however, do not qualify.

Under the Private Residence Relief rules, landlords can also get CGT relief for the years the property was their primary home. Some are even turning to holding their buy-to-let properties within a limited company, making them liable for corporation tax, which often starts at a more palatable rate of 19% on profits up to £50,000.

Wrapping Up

While the wealthy still bear the brunt of CGT, with a tiny fraction (less than 1%) accounting for a massive 45% of all receipts, many ordinary taxpayers are feeling the heat too.