Your Guide to Capital Gains Tax

Tax isn’t exactly the most exciting topic in the world, but as a landlord, understanding your tax responsibilities is pretty important.

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Of course, not all tax is created the same, and this particular guide will help you navigate the intricate details of Capital Gains Tax (CGT). So, if you’re looking for more information on Capital Gains Tax, you’ve come to the right place.

What is Capital Gains Tax?

Capital Gains Tax is charged on the profit you make when you sell an asset, including a property. It’s important to remember, however, that the tax is calculated on the profit you gain, rather than the price you sell for. Eg, if you buy a home for £250k and sell it for £300k, you will only pay CGT on the £50k profit.

How does Capital Gains Tax work?

Capital Gains Tax is charged when an asset is ‘disposed of’. This includes selling, gifting, swapping and compensating. You will pay Capital Gains Tax on the gain you make when you dispose of the majority of personal possessions worth £6,000 plus (your car is exempt from this), property that is not your main home, your main home if it is rented out, used for business or is very large, shares that are not in an ISA or PEP and business assets.

How much can I earn before paying Capital Gains Tax?

As a landlord it is important to understand how much you can currently earn before having to pay Capital Gains Tax. For the tax year of 2020/21, your tax-free allowance currently stands at £12,300. So, for example, if you sell your property with a £100,000 profit, only £12,300 of that is exempt from Capital Gains Tax.

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What are the Capital Gains Tax rates?

The tax rate you are expected to pay depends on the total amount of your taxable income and the marginal rate of personal tax. As a landlord, you need to work this our first. You can use the following as a guide to understand the rates:

  • You pay 10% or 20% tax rates for individuals
  • 18% or 28% tax rates for individuals for residential property and carried interest
  • 20% for personal representatives of someone who has passed away (not including residential property)
  • 28% for representatives of someone who has passed away for the selling of a residential property.

There you have it. A quick and easy guide to the basics of Capital Gains Tax. This topic can be a challenge to get your head round, so be sure to reach out to an expert for guidance and help to ensure you are paying the correct amount!

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