back Posted on 9 February 2023
Chancellor Jeremy Hunt announced in his Autumn Statement in 2022 that the current Capital Gains Tax allowance of £12,300 is being halved to £6,000 from April 2023 and then cut again to £3,000 from April 2024. That could mean an increased tax bill for many property owners planning to sell in 2023, but what can be done to avoid it?
What is Capital Gains Tax?
The UK Government describes Capital Gains Tax as a tax on the profit upon the sale of (or ‘disposal of’) something (an ‘asset’) that’s increased in value. So, if a painting was purchased for £5,000 and it was sold later for £25,000, the gain is £20,000 (£25,000 minus £5,000).
An asset, in this case, could be but isn’t limited to, things like personal possessions, a second home or shares that aren't within an ISA. Therefore, those who own or are planning to sell a second home will be required to pay Capital Gains Tax.
A higher-rate taxpayer will pay 28% on any gains from residential property. Those on basic taxpayer rates will see the rate changes depending on the size of the gain; 18% on residential property if it’s within the basic income tax band (£37,700 for the 2021 to 2022 tax year) or 28% if it’s higher.
The rules are different for trustees and businesses, and full details can be found on the UK Government website.
How does this specifically affect property owners?
If a homeowner purchased the property for £200,000 and sold it for £250,000, the ‘gain’ would be £50,000. That would mean the current taxable income for that property would be £37,700 (£50,000 minus £12,300 = £37,700), and £6,786 would be payable in CGT for a basic rate taxpayer. However, in the next tax year, that taxable income for the same property would be £44,000 taking the CGT tax bill to £7,920. In 2024 that taxable income would be £47,000 taking the CGT tax bill to £8,460.
In summary, anyone looking to sell a property in the next year is advised to sell quickly and complete the sale before the end of the 2023/24 tax year at the end of March 2024.