What Is The Capital Gains Tax Allowance For 2020-21?
According to a recent report from the “Office of Tax Simplification” (OTS), the capital gains tax (CGT) system has the potential to be made “simpler and fairer” by reducing the annual exempt amount and raising rates to match income tax. This information emerged into the public sphere after Chancellor Rishi Sunak asked the OTS to carry out a comprehensive review of the capital gains tax system back in July 2020. This resulted in a report focusing on the design and principles supporting Capital Gains Tax containing 11 recommendations for change.
A second report examining technical and administrative issues is due to be released in early 2021.
Here is a look at the report’s suggestions, how they could affect you, and how to protect yourself from potentially higher payments.
What is capital gains tax?
With regards to property and land, capital gains tax is a tax charged on the profit made on a property (or land) that is not your main residence. This might include land: a property which is a business asset, a rental property, a second home, or a property that you have inherited, which is sold having increased in value.
It’s the ‘gain’ that’s taxed, not the payment received. The rate charged depends on the asset being sold and whether the seller is a basic, higher or additional rate taxpayer. On the sales of second homes, the respective rates are 18 per cent and 28 per cent.
You do not usually pay tax on gifts to your husband, wife, civil partner or a charity.
What Is The Capital Gains Tax Allowance For 2020-21?
All taxpayers have an annual CGT allowance, enabling them to earn a certain amount tax-free. In 2020-21, you can make tax-free capital gains of up to to £12,300 (up to £12,000 in 2019-20). Couples who jointly own assets can combine this allowance, allowing a gain of up to £24,600.
Taxpayers paid £9.5bn in CGT in 2018-19 – the highest amount yet but some of the suggested changes in the report could ‘raise a substantial amount of tax for the Exchequer’. The OTS has previously looked into the inheritance tax system. Publishing a report back in July 2019 but none of its recommendations have been implemented to date.
Here are the main proposed changes and how they could affect your property sale and its profits if the government chooses to implement them.
- Fewer And Higher CGT Rates
The OTS has suggested that CGT rates should be ‘more closely aligned’ with income tax rates. This could lead to some of the current rates being doubled. The OTS report says the current difference between CGT and income tax rates can distort the way people dispose of assets such as choosing to be paid for work in shares where there is less tax to pay.
Additionally, the report says the fact that there are four different rates you might have to pay, depending on the asset and which income tax band you are in, makes the tax difficult to understand/get around.
Currently, basic-rate taxpayers pay 10% CGT on assets, and 18% CGT on property, while higher-rate taxpayers are charged 20% on assets and 28% on property. Such rates are considerably less than the income tax rates which are 20% for basic-rate taxpayers and 40% for higher-rate taxpayers. If a higher, flat-rate of tax was introduced, higher rate taxpayers could face a flat rate of 40% or more. Basic-rate taxpayers will also stand to pay far more CGT than they do now.
- Reduced CGT Tax-Free Allowance
When a landlord sells a buy-to-let property, they must pay capital gains tax on any profit they make which is above the annual capital gains allowance. Basic rate taxpayers must pay 18 per cent in capital gains tax on gains above this threshold, whilst higher rate taxpayers must pay 28 per cent. For 2020-21, the annual exempt amount is £12,300, but the report suggests this should be reduced to between £2,000 to £4,000. They say that most taxpayers who are new to paying CGT would still come under this threshold.
The report has identified an issue with taxpayers ‘using up’ the annual exempt amount each year before being charged tax. They feel that people’s behaviour is distorted by the allowance meaning it ought to be changed. For 2020-21, the annual exempt amount is £12,300, but the report suggests this should be reduced to between £2,000 to £4,000. They say that most taxpayers who are new to paying CGT would still come under this threshold.
Homeowners who once lived in a property but went on to let it out don’t have to include the years they lived there when working out their capital gains tax liability. Before April this year they could also claim tax relief on any gains made in the final 18 months of ownership, regardless of whether they were living at the property. This has now been reduced to nine months.
- Lettings Relief Restricted.
Lettings relief used to provide capital gains tax relief of £40,000 per owner when they sold a property that was their home before it was let out. Couples who jointly owned a property could therefore claim relief of £80,000. Under current rules, lettings relief is now only available to landlords who are living in the property themselves when it is sold.
If the government chooses to make this change, the report says it should also exempt more personal items whereas if fewer assets come into the scope, then those who only make small profits will not need to pay CGT.
- Capital Gains Tax Bills To Be Paid Within 30 Days
Another major change for buy to let landlords in the 2020-21 tax year is that when they sell a property and owe capital gains tax, an estimate of the tax bill must be paid within 30 days of the completion date.
- CGT On Inherited Assets
The OTS says CGT and Inheritance Tax (IHT) do not work well together, particularly those in place surrounding the inheritance of property.
If someone were to inherit a property then sell it for a profit, the CGT owed would be based on the price difference of the asset when they received it and when they sell it, rather than the price the deceased bought it for.
This is likely to massively reduce the amount of CGT paid on the asset, and is known as “CGT uplift”.
The OTS suggests that those who inherit assets, who are exempt from IHT, shouldn’t benefit from CGT uplift as well, as is sometimes the case at the moment. Instead, they should pay CGT based on the price paid by the person who has died. Currently, this is calculated as being the asset’s estimated value in 1982.
Conveyancing Supermarket work with some highly respected tax specialists who can assist limiting liabilities on both Capital Gains Tax and Inheritance Tax. Family Matters are experts in ensuring wealth is maintained for individuals in their lifetime and for generations that follow.