Capital Gains Tax is changing, are you ready contractors?
With much of the media’s focus quite understandably on IR35 reform, for many contractors, proposed tweaks to Capital Gains Tax (CGT) might well have slipped under the radar, writes Troy Stevens, director at QAccounting.
While capital gains tax is perhaps not one of the most spoken about areas of tax, it is, nonetheless important for thousands of contractors with assets of considerable value. With this in mind, we should now look closely at CGT and answer some of contractors’ most Frequently Asked Questions about this tax.
What is CGT and how does it work?
Capital Gains Tax is essentially the tax obligation resulting from a gain realised when disposing of an asset or assets. A gain can be simply defined as the increase in the value of an asset in excess of the original purchase cost. It is important to note that it is the actual gain that is taxable, not the actual amount received.
Does it only apply to assets sold?
No. It includes assets sold, but also applies to assets that you give away as a gift or transfer to another person. The same goes for swapping or part exchanging an asset or receiving compensation for it, for example, in the form of insurance.
What is the rate of tax?
For the current tax year, HMRC has set the CGT personal allowance at £12,000 -- a £300 increase from the previous tax year. In simple terms, this means any gain above the £12,000 ceiling limit will be subject to the levy. The table below should give you a clearer picture of the tax rates chargeable:
|Class||Basic rate tax payers||Higher rate tax payers|
|Tax rate for individuals - not including residential sale||10%||20%|
|Tax rate for individuals - including residential sale||18%||28%|
What does CGT apply to?
A wide range of assets. The obvious example is a property that isn’t your main home. Bear in mind that CGT does apply to your main home if you’ve let it out, used it for business or has appreciated in value when vacant.
You may also need to pay CGT when you sell personal possessions for £6,000 or more, aside from your car. Shares not in an ISA of PEP (Personal Equity Plan) also fall under CGT, as do assets that you might have bought through your limited company as a contractor.
Other assets, like paintings, jewellery, antiques and even coins and stamps are also subject to CGT.
Is CGT changing?
Yes. For as far back as time goes, CGT has always been reported on your self-assessment tax return. This means you aren’t required to report or settle CGT until January 31st following the end of the fiscal year. Furthermore, the amount payable would be settled in one single payment, without the demand for advanced payments on account.
CGT, however, will undergo changes from April 2020, which will see taxpayers reporting the gains made on the sale of residential property within 30 days of the disposal. This reform will also entail the following:
- The preparation and submission of a provisional CGT return within 30 days of the disposal
- The taxpayer will also need to make a payment on account of the expected CGT
It’s important to note that changes to the reporting of CGT do not nullify the requirement to complete a self-assessment tax return. In other words, you’ll still need to complete and submit this by January 31st, as is currently the case.
Are there any upsides to the changes?
It’s not all bad news. The chancellor of the exchequer (currently Philip Hammond) has allowed for certain exemptions from provisional reporting, which include:
- Where there’s a transfer of a property between spouses, which is also known as a nil gain transaction
- Where the gain is covered by private residence relief, which excludes CGT
- Where there are other losses brought forward, which fully offset the loss and results in a nil gain
Are these reliefs changing?
Somewhat. Let’s say you own a property and sell it after living in it for most of your life -- you will not be subject for CGT for the duration of occupancy. If you have vacated the property for a period of time and during the time the property has appreciated in value, then you will be liable to CGT on the gain. Prior to April 2020, the last 18 months of the ownership was always granted tax-free. However, this will be reduced to 9 months next year.
The second and final change to CGT relief focuses on ‘lettings relief.’ As it stands, you’re exempt from CGT for all or part of the gain appreciated on a property you own during the period you let it or part of it out for.
This is due to change in April 2020. Reform announced in the Budget last year will limit the availability of lettings relief and restrict it to those who are sharing occupation of their house with a tenant. Furthermore, lettings relief will not be granted if the owner moves out of the property.
Will this make life difficult for contractors?
The changes to CGT impact all taxpayers. The requirement to report CGT within 30 days is just another way of the exchequer filling its coffers sooner. Most contractors will be aware that they must make payments on account for the self-assessment tax bill twice a year (in January and July of that respective year). Historically, the advanced payment regime was only applicable to self-assessment tax. However, this has now been extended to CGT and a payment on account will also be required within 30 days of the sale, gift or disposal being completed.
Overall, this shouldn’t make things difficult for individuals. If anything, it will encourage tax-payers to equip themselves with real-time information, enabling them to organise their finances better. The reason for this is that previously if you sold a property, you would declare the gain or the tax payable on the self-assessment tax return 10 months down the line (i.e. January 31st). However, HMRC now requires real-time information and you would be required to declare the gain or to make a payment in advance before you have submitted the tax return.