Capital gains tax is sometimes called the forgotten tax, but Rachel Reeves remembers (Image: Getty)
It’s often described as the “forgotten tax”, yet it cost Britons more than £14.5billion last year, almost double the inheritance tax take.
Anybody who’s been caught won’t forget it in a hurry.
I’m talking about capital gains tax (CGT). Most of us don’t give it much thought until we’re suddenly get hit by a bill when selling something.
Until just a few years ago, it was possible to make gains of up to £12,300 a year before CGT kicked in.
That was known as the annual exempt amount. Former Tory Chancellor slashed that twice. Today, it stands at just £3,000 a year.
Then in her October Budget, Rachel Reeves got in on the act.
She hiked the lower rate of CGT for basic rate taxpayers from 10% to 18%, and the higher rate from 20% to 24%.
Many investors, property owners and even casual sellers now risk unexpected bills, said Sarah Coles, head of personal finance at Hargreaves Lansdown. “CGT is far less well-known than its tax siblings, but packs serious clout.”
Coles lists seven surprising ways you might now trigger an unexpected CGT bill, and how to fight back. It pays to act before the current tax year ends on April 5.
Falling allowances. Many will get caught out because they think the CGT annual exempt amount is higher than it really is. Gains above £3,000 will be taxed, Coles said. “More people than ever are being hit with CGT for the first time, often without realising until it’s too late.”
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Higher tax rate. Reeves’s decision to hike the CGT rate to 18% for basic-rate taxpayers and 24% for higher-rate taxpayers could raise £2.5billion.
It will also trip up couples who had structured their investments to be taxed at the lower rate, Coles warned.
Gifts can also trigger a tax bill. Many assume CGT only applies when selling assets, but gifts can also incur tax.
If you gift anything (other than to a spouse or civil partner), CGT may be due on the gain made since its purchase. “Even transfers to family members can trigger an unexpected bill,” Coles said.
Selling assets below market value. Some people try to sidestep CGT by selling an asset – like a second home – to a family member at a reduced price. Unfortunately, will still base tax on its full market value, not sale price.
Crypto transactions. Many users of cryptocurrencies like Bitcoin see it as a form of currency, but treats it as an asset.
“If you buy goods or exchange crypto for another cryptocurrency, you’re still making a ‘disposal’ that can trigger CGT. Keep detailed records,” Coles said.
Swapping assets. Swapping properties, crypto or other assets doesn’t make CGT disappear. They count as a sale. “The tax is due on the gain in value since purchase, even if no money has changed hands,” Coles said.
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Selling valuables online. If you sell personal items worth over £6,000 and make a gain of more than £3,000, CGT may apply. This includes jewellery, paintings, and antiques, although cars and certain time-limited items like clocks are usually exempt. Even sets of collectibles can be taxed if sold to the same buyer.
There are ways to limit your exposure to CGT. First, make full use of your £3,000 annual exempt amount if you can.
You can also offset any losses against any taxable gains you’ve made. Unused losses from previous years can even be carried forward.
Shares escape CGT once inside a tax-free ISA. Transferring eligible assets .
Spouses and civil partners can transfer assets tax-free, allowing them to use both annual CGT exempt amounts.
Consider Venture Capital Trusts (VCTs) too. These high-risk investments are CGT-free and offer up to 30% income tax relief too. They’re not for everyone though.
If you have a capital gain, it’s time to take action. The end of the financial year is just one month away.