The amount of capital gains tax collected by HM Revenue and Customs has nearly doubled in a year.
HMRC gathered £14.3 billion in CGT in the 2020-21 tax year – a massive 42 per cent rise over the previous year.
And six times as many taxpayers contributed to the Treasury’s CGT coffers – up from 53,000 in 2019-20 to 323,000.
Official data gives no reasons for the considerable increase in CGT nor shows how much was paid by landlords selling former private rented homes.
However, the policies thought to influence the figures include:
- Landlords quitting buy to let
- Changes to entrepreneur’s relief
- A massive 42 per cent stock market rally as the pandemic downturn ended
And the Treasury will likely benefit from even more CGT in 2021-22, thanks to surging house prices.
- 1 What is capital gains tax?
- 2 How does capital gains tax work?
- 3 How much CGT will I pay?
- 4 CGT FAQ
What is capital gains tax?
Capital gains tax – also called CGT – is a tax on the profit made when selling or gifting a home which has increased in value during your ownership. The tax is charged on the difference between the purchase and sale prices after deducting some expenses and reliefs.
How does capital gains tax work?
CGT is not only charged on property but other assets, like the proceeds from selling a business, fine art and antiques, and stocks and shares.
For landlords, CGT taxes the taxable gain, which is arrived at with a simple formula:
Start with the selling price or market value, the subtract
- Purchase cost or market value
- Purchase costs
- Improvement costs
- Disposal costs
- The selling price is the value paid by the buyer or the property’s market value.
- The purchase price is the amount paid to buy the property or the market value.
- Purchase costs cover stamp duty, legal fees and auction costs, for example
- Improvement costs are the price of adding something to the property, like an extension or garage, but not repairs
- Costs of sale include estate agent or auction fees and legal fees
Which leaves the chargeable gain.
Before working out the tax, deduct the annual exempt amount (AEA), similar to the income tax personal allowance. The current AEA is an allowance of £12,300 (August 2022).
Next, deduct any reliefs that might apply.
How much CGT will I pay?
Landlords pay two CGT rates for property – 18 per cent for basic rate taxpayers and 28 per cent for higher or additional rate taxpayers. The tax is calculated on the net chargeable gain after taking the AEA and any reliefs from the chargeable gain.
Landlords in Wales or Scotland pay the same rates as property investors in England, even if they pay a local income tax rate.
The amount of CGT paid depends on how much other income you have, and the CGT amount is added to a landlord’s total taxable income.
If your other income is less than £50,270 a year, the proportion of your gain charged at 18 per cent is the difference between £50,270 minus your total taxable income, and the rest is taxed at 28 per cent.
Higher or additional rate taxpayers pay CGT at a rate of 28 per cent.
What is my CGT if I sell at a discount to a friend?
Suppose the agreed price is at odds with the price of similar property in the neighbourhood. In that case, HMRC will expect the seller to calculate CGT using the home’s open market value, which is typically the average of three estate agent valuations.
When do I pay CGT?
CGT should be paid within 30 days of the sale completion.
What if a family lived rent-free on the property?
CGT is still due; no discount is offered if friends or family have lived in the property rent-free.
What is the date of disposal?
The date of disposal is the date contracts were exchanged on the home, not the completion date.
Is CGT due if I gift property?
Yes, CGT is due when gifting property because the tax is paid on the disposal of property, not just the sale. However, if you gift a property or share of a home to your spouse, no CGT is due.
Find out more about capital gains tax
HMRC publishes technical guidance about capital gains tax in a free online manual. Don’t forget, the guidance is just that – HMRC’s interpretation of the rules and has no force in law.