From April 2023 Capital Gains Tax (CGT) allowances were reduced, and will reduce further in April 2024
During his Autumn Statement on November 17, 2022, Chancellor Jeremy Hunt announced that there would be a reduction in Capital Gains Tax (CGT) allowances starting from April 2023. Additionally, another reduction in allowances would take place from April 2024.
Capital Gains Tax was introduced in the United Kingdom in 1965. CGT is a tax that is applicable when a specific type of asset is sold or disposed of. Initially, it applied only to gains on the sale of land and buildings. Over the years, the scope expanded to include other assets, with changes to rates and allowances.
Today, it encompasses not only land and property, including second homes and investment properties, but also extends to the sale of art, antiques, or shares (excluding those held within an ISA or PEP). CGT has undergone multiple reforms to align with evolving economic and tax policy objectives.
The calculation of CGT involves determining the difference between the acquisition cost of an item and its value at the time of disposal. This calculation may also include cases where items are gifted. When computing the tax liability, certain allowable expenses can be deducted. For instance, in the context of residential property, this could include expenses like legal and surveying fees.
What is the Capital Gains Tax allowance?
At the beginning of 2023, the Annual Exemption Allowance (AEA) for Capital Gains Tax was £12,300. From April 2023 this was reduced to £6,000. The annual exempt amount will reduce further to £3,000 from April 2024. The Capital Gains Tax allowance represents the annual tax-free threshold that individuals can receive when they have a capital gain before they are required to pay Capital Gains Tax.
If someone is contemplating selling or gifting an asset in the near future, it is important for them to carefully consider the timing of the disposal as they may be able to avoid having to pay CGT at a higher rate if they can wait until the next tax year. Seeking advice from professionals at the earliest opportunity is advisable in order to make informed decisions and understand the potential tax implications associated with the transaction.
How will CGT affect divorce financial settlements?
Capital Gains Tax (CGT) can have implications for divorce settlements, particularly when it comes to the division of assets. Here are some key points to consider:
- Transfer of Assets: During a divorce, assets may be transferred between spouses as part of the settlement. Transfers of assets between spouses are generally exempt from CGT, meaning no immediate tax liability arises at the time of transfer. This includes transfers of assets between married or civil partners, as well as transfers made in accordance with a court order as part of the divorce settlement.
- Future CGT Liability: While there may not be an immediate CGT liability upon the transfer of assets during divorce, it’s important to consider the potential CGT implications in the future. The recipient spouse assumes the transferor’s original cost basis for the asset. When the recipient eventually sells or disposes of the asset in the future, they may be subject to CGT based on the increase in value from the original cost basis.
- Principal Private Residence Relief (PPR): PPR provides relief from CGT on the sale of a main residence. Typically, the transfer of the family home between divorcing spouses doesn’t trigger CGT, as long as it has been their main residence throughout the ownership period. However, if one spouse moves out and the property is not occupied as a main residence, the CGT exemption may be affected.
- Tax Planning and Advice: It is important to seek professional tax advice and guidance from a qualified accountant or tax specialist experienced in divorce settlements. They can help you understand the potential CGT implications, explore tax planning strategies, and ensure the division of assets is structured in the most tax-efficient manner.
It’s crucial to note that tax laws and regulations can vary between jurisdictions, so it is advisable to consult with professionals familiar with the specific tax rules and legislation in your country or region.
Will you be impacted by the Capital Gains Tax UK Changes?
The government projects that approximately 500,000 individuals and trusts may be influenced by these modifications in the tax year 2023 to 2024, with that number rising to 570,000 in the subsequent tax year.
By the 2024/25 tax year, an additional 260,000 individuals and trusts are estimated to potentially become liable for Capital Gains Tax due to these changes, which would not have been the case if the alterations had not been implemented.
It’s worth noting that ISAs will remain unaffected by these changes, and private residence relief (PRR) on main homes will also remain intact. Even if Capital Gains Tax is not payable, there is still a requirement to report any gains of at least £50,000 to HMRC.
Contact Lloyd Platt & Co for assistance with CGT
If you need help with calculating potential Capital Gains Tax or seek advice on how Capital Gains Tax UK changes will affect your financial settlements, including guidance on the timing of your disposals, please reach out to us. Read more about our Divorce Lawyers in London.
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