Capital Gains Tax

The Probe - July 2007

Capital Gains Tax (CGT) has grown increasingly complex over the years, but is simply a tax payable on making a gain. Anybody who is a higher-rate income tax payer, and has a taxable gain, will pay 40% tax on it. However, the taxable gain may often be much less than the actual gain because of various reliefs.

Every person, including minors, is exempt from CGT on the first slice of their net gains in any tax year - up to a figure called the 'personal exemption'. For the 2007/08 tax year, the personal exemption is £9,200.

The second relief is that the longer you’ve held the asset the more the gain is reduced. So a non business asset such as a buy to let investment once held for 10 years or more gets further relief of 40%. You can also receive generous tax relief if you’ve ever lived in the property.

So let’s just take an example of a property that was bought in 1998 and you’re planning to sell it next year so you’ll have held it for 10 years. If we assume you’re anticipating a gain of £100,000 and are therefore concerned you’ll have to pay £40,000 tax.

The tax would be as follows. The gain of £100,000 can be reduced by allowable costs such as estate agents fees, any improvement works and purchase costs such as stamp duty. So if we assume they total £15,000, this leaves a profit of £85,000.

This is then reduced by 40% as you’ve owned the asset for 10 years. So at this stage only £51,000 is taxable. But you also have the exemption of £9,200, so only £41,800 is taxable at 40% leaving a tax bill of £16,720.

You can actually reduce this even further by buying the property in two peoples names and benefit from two personal allowances. This would reduce the tax bill to only £13,040 or even less if your partner is not a higher rate tax payer. Also provided it’s in two peoples names prior to sale you can claim both allowances so it’s not necessarily too late if you’ve already purchased in one name.

I’ve actually taken this one stage further and bought property in my name, my wife’s name, and Richard & his wife’s name so we’ve got total personal exemptions of £36,800 in any tax year! Let’s just hope the property goes up in value!