The amount paid in Capital Gains Tax (CGT) has soared to new heights, with many discovering property is now not the investment they thought it would be.
Capital Gains Tax is a tax on the profit when you sell or ‘dispose of’ an asset – you are taxed on the ‘gain’, not the amount of money you receive. There is an annual exempt allowance – the maximum profit you can make on selling or disposing of assets without paying Capital Gains Tax. The allowance is £6,000 for the 2023-24 tax year, slashed from £12,300 in 2022/23 and it reduces to £3,000 next year. So for example, if you bought shares in a company for £5,000 and later sold these for £15,000, you could be taxed on £4,000 of the profit. An ‘asset’ could be many things, such as property, shares or even antiques.
Figures released by HM Revenue and Customs (HMRC) have showed that CGT hit a record £16.7billion in the 2021-22 tax year, up 15% on the year before.
It is significantly glaring when it comes to property sales, with the data showing that 139,000 tax payers disposing of a total of 151,000 residential properties in the 2022-23 tax year, making a CGT liability of £1.8bn, much larger than the previous year.
It is thought continuing high property prices with the looming threat of a housing market crash has prompted more landlords to sell up, as well as the tightening of tax laws on buy-to-lets, making property a less attractive investment.
Most people who own property are unlikely to be able to avoid CGT during their lifetime and the changes to tax law make it a more restrictive investment than it once was.
There is a far better investment option in ISAs, which enjoy far better tax treatment and diversity opportunities, as do pensions.
There is no limit on the total investments you can hold tax free within ISAs, the money inside them can grow tax free and you can choose from various options such as a Lifetime ISA or stocks and shares ISA. You are allowed invest £20,000 per year in ISAs completely tax free.
Pensions too offer more tax benefits than plunging your wealth into bricks and mortar. For one thing, the Government recently scrapped the cap on the Pensions Lifetime allowance, which means people will not be taxed the more they save. Previously, you could only build up just over £1million in a pension during your lifetime before having to pay a charge.
The pension annual tax free allowance was also increased to £60,000 from £40,000, this meaning you can now pay up to £60,000 into your pension each year.
Plus, everyone who pays into a pension is entitled to 20% tax relief – and 40% if you are a higher rate tax payer, 45% if an additional rate tax payer.
If you are seeking to invest and avoid the worst of CGT, please consider seeking advice from an Independent Financial Adviser, who will be able to help guide you through the complexities and find the solutions that are best for you.
