subject: Capital Gains Tax Explained [print this page] Capital Gains Tax Explained
Many property owners may be wondering how the proposed changes to capital gains tax might affect them. After all, one of the reasons for owning property is to secure capital growth as well as income, so just considering the short-term need for landlords insurance in all its guises is not enough. You also need to know the financial consequences of selling your property.
At the moment, almost any sale of an asset with the exception of your own principal residence and many forms of personal chattels can give rise to a taxable gain. This most commonly applies to the sale of shares and collective investments (other than those within an Individual Savings Account or pension plan) and commercial or residential property that you do not live in yourself.
The rules are fairly simple; to calculate the amount of tax you will have to pay, simply deduct from the sale price (less directly associated costs) the price you originally paid for it, to identify the gain. During each tax year you can realise gains of 10,100 before you pay any capital gains tax and it is then levied at a rate of 18%.
This means that if you sell for 200,000 an investment property you originally purchased at 150,000, the gain is 50,000. Tax would therefore be levied at 18% on 50,000 less 10,100, or 39,900 and would therefore be 7,182. If, however, the sale price was only 160,000, there would be no capital gains tax at all (assuming, in both cases, that you have not realised any other taxable gains during the tax year).
The special 10% "entrepreneurs" rate applicable to the first 2 million of lifetime gains does not apply to property of this nature but only to certain types of business assets.
The full details of what might change will be revealed in the budget although if the coalition government follows its predecessor, it may take quite a bit longer to unravel the real details. However, early indications are that the rate of capital gains tax will increase possibly to mirror the individual's income tax rate, which could be 40% or 50% in many cases.
The devil will be in the detail, especially in respect of whether any time-based relief will be applied (as was the case some time ago) and whether any exemption will remain, as currently. It is also to be hoped that the gain, being added to other income, will not actually force the individual into a higher tax bracket; to do so would seem absurd, but the government needs every penny it can raise to reduce the national debt.
It is important to seek independent professional advice before making any decision about insurance for landlords and liability insurance as well as your financial obligations. You should always ask your insurance advisers what experience they have of dealing with residential and/or commercial rental property insurance.
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