An Ultraguide to Capital Gains Tax

24 Feb 2022

Capital Gains Tax (CGT) is a tax on the profit when you sell or ‘dispose of’ something such as an asset which in this case would be a property that has increased in value.
 
It’s the gain you make that’s taxed, not the amount of money you receive.
 
What CGT would I pay when selling a property?
 
For example, if you bought a house for £25,000.00 and then sold it for £100,000.00 you would be taxed on the profit/equity which in this case would be £75,000.00.
(£100,000.00 minus £25,000.00)
 
The Capital Gains Tax structure would be as follows:
 
House Purchase Price
£25,000.00
 
House Sale Price
£100,000.00
 
Equity: Tax Liability
£75,000.00
(sale price minus purchase price)
Tax-Free Allowance
£12,300.00
(allowance before paying tax)
Taxable Amount
£62,700.00
(tax liability minus tax-free allowance)
Capital Gains Tax Paid
£11,286.00
(18% for residential property)
Profit after CGT
£51,414.00
 
 
If you pay higher-rate tax, or your gains combined with your income bring you into the higher rate, you’ll pay 20% for most assets and 28% for residential property.
 
Ways to cut your CGT bill
 
There are a couple of ways that you can legally reduce your Capital Gains Tax bill.
 
1) You can transfer ownership of assets to partners and spouses and most of these transfers of capital are free from CGT. Once you have transferred the assets you can both use your annual allowance which means rather than you potentially paying a higher tax rate you can split the assets and both still have an allowance and lower the tax rate charged. For example, if you had 2 Buy To Let properties it would be a sensible option to have 1 in your name and 1 in a partner's name so if you were to sell those properties you can use both your tax-free allowances and not just one.
 
2) Maintaining your assets can work in your favour as well. For this example, say you had a Buy To Let property that needed some refurbishments or maintenance work done, when you complete these works you can deduct those costs for tax purposes.
 
3) Increasing your pension contributions is also another way to lower the amount of CGT you will be charged. Due to CGT being linked to the rate of income tax you pay, you can reduce it by putting more of your income into a pension which would lower your income tax amount and consequently your CGT amount.
 
Those are a couple of examples where you can help legally reduce your Capital Gain Tax amount especially surrounding residential properties.
 
CGT tax liabilities are a huge factor for a lot of Ultralets+ vendors who are often selling off large tenanted portfolios built up over the last 40 years. We're here to help and advise our clients on the best times to sell.
 
From a buyer's perspective, a vendor facing a large tax liability when selling can be a benefit. Often getting the maximum sale price isn't as high of a priority and a swift and controlled completion time frame within a certain financial year matters more than the vendors bottom line.
 
We hope this article has been some help and for any investment advice do not hesitate to contact our team who will be happy to guide you through the full process.

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