While there was discussion before the budget about changes to Capital Gains Tax (CGT), it came out of the statement unaltered. But there’s still the threat of a CGT rise and landlords and multiple homeowners fear about the potential impact.
This does not constitute advice and advice should be sought in all instances before acting on it. The Financial Conduct Authority does not regulate tax advice.
The CGT basics
Capital Gains Tax is paid on any profit of an item sold where the value has increased. This applies to gains made on the sale of buy-to-let properties as well as second homes. Since the first £12,300 profit is exempt, the current rate of tax for basic taxpayers is 18% while the rate for higher rate taxpayers is 28% on the remaining returns.
Potential rate hike
The Office of Tax Simplification is proposing changes to the tax threshold, which could increase the tax landlords and multiple homeowners face.
The recommendations are to raise CGT in line with income tax rates to 20% at the basic rate and 40% at the higher rate, while also significantly reducing the initial exemption amount to a mere £2,000.
Since average house prices have increased, that means the profit many property owners will earn upon selling will increase as well, and in turn, so will the CGT owed.
How to reduce CGT
While there’s nothing that can be done about the percentage of tax paid on capital gains, you can reduce the end sum.
In order to bring down the taxable amount, you can include the costs you incurred as part of your investment – both when you purchase the property and while you own it. This increases the initial investment cost and decreases the capital gain.
Don’t forget to include costs such as legal fees, stamp duty, and even mortgage broker fees when you buy the property and the expenses incurred maintaining, refurbishing, or updating the property.
Need tax help?
If you need help working out if you’ll be affected by these proposed changes, or need some advice on how to reduce CGT when it comes time to sell, we’re here to help.
Tax planning is an important part of financial planning, but it’s just one part of a solid financial plan. In order to save on tax and get the most out of your finances, work with a financial adviser who will put together the best financial plan for your goals and dreams.
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