Capital Gains Tax exemption reductions halve profits

Significant reductions to CGT annual exemptions cut the amount of ‘capital gain’ an individual can earn from property sales by more than half.

Significant reductions to the annual exemption of Capital Gains Tax (CGT) have come into force this month (April), which cuts the amount of ‘capital gain’ or profit an individual can earn from property sales by more than half. 

CGT applies to any profits made on second properties sales and other assets which fall under CGT rules, including antiques, arts or shares. 

Previously, the annual exemption amount was set at £12,300, but this has been cut to £6,000 from this month and will be halved again to £3,000 from April 2024.  

Current reporting requirements for CGT have also changed over the past few years. Original filing rules initially required HMRC returns to be filed within 30 days of completion date, but this has now been extended to 60 days for completed property sales on or after 27 October 2021, after it was felt the 30-day deadline did not give individuals enough time. 

Complexities surrounding CGT present many challenges including: 

• Higher tax now potentially payable on any gains made 
• 60 days to submit HMRC returns – many believe this is still not enough time to file a return, and significant penalties can arise when declarations are late 
• Existing difficulties with Government gateway IDs – a different ID is required from self-assessment which could present further frustrations 
• Overseas owners may have difficulties providing valid ID and financial information to HMRC 
• Exchange rate fluctuations mean owners of assets which are based on a foreign currency can continue to suffer significant gains in Sterling terms for assets which have not actually had any real underlying change in value. 
• The impact of inflation – and the fact that the UK CGT rules provide no innate tax relief for inflation – means that people may increasingly be liable to CGT based on rises which are purely the result of inflation, rather than any increase in the underlying value of a product.  

Overall, the changes will probably result in many more ‘small taxpayers’ being brought into self-assessment than was historically the case. This will logically result in more delays from HMRC, which is already struggling with a lack of resources, and could easily result in advisors (and taxpayers) facing additional delays and costs. 

So what do accountants think?

Changes could significantly affect the housing market 

Nadeem Raziq, Head of Tax, Provestor 

The reduction of the CGT Annual Exempt Amount is not great news for property investors. From April 2024, the tax-free allowance will have reduced by 75%.  

The loss in the tax-free CGT allowance is particularly significant for those who own a property jointly. Previously, individuals would have had £12,300 each and £24,600 in total tax-free, but they will now only have £6,000 in total from April 2024. For higher rate earners, this means an additional CGT bill of over £5,000.  

In the future, landlords could retain properties for longer, even when they are no longer profitable, due to high CGT. Ultimately, this tax change could have a negative impact on the housing market.  

At Provestor, our property accountants advise clients to regularly review their portfolio, and this is something we proactively do pre-year end with clients. It’s vital we support landlords who are weighing up which properties to keep or let go. The rather sudden announcement in November caught a lot of landlords off guard.  

Our advice is that landlords should prioritise assessing whether to sell a property in the next year, ie before the next set of changes come into effect. 

Verdict: Reduction of annual exempt amount could have negative impact on housing market. 

It’s hard for clients to keep track of changes 

Dominic Ahern, Director, Best Suited Chartered Accountants 

Those most impacted by the reduction in annual exemption will be those who have accumulated moderate investments in funds and stocks and who historically have looked to generate annual net gains around the £10-15k mark. Buy-to-let investors will also be impacted as they dispose of investments. However, as transaction costs are much higher there’s less opportunity for precision with this type of planning.   

Separately, the reporting of CGT was not all that well publicised by HMRC so generally awareness has been low. The original filing requirement of 30 days from completion was far too short and extended to 60 days, which can still be relatively challenging, especially if it’s the sale of a property with capital improvements, as it can sometimes take longer to establish and substantiate the value of works. 

We have been flagging with clients up front if we know they might be looking to sell a property. However, we are still concerned that clients who are only in touch annually for their returns might miss the 60-day deadline, and we will have little opportunity to make them aware if we are not regularly updated on their plans. 

Verdict: Clients who are only in touch with accountants once a year may be unaware of CGT changes. 

It’s frustrating agents can’t manage the entire CGT process 

Lisa Neale, Tax Associate, Carpenter Box 

The changes to the CGT reporting regime for UK property disposals (introduced from April 2020) have certainly had their challenges. For example, agents are unable to manage the entire process for clients. Whilst we provide our clients with full instructions for setting up the CGT online account, our clients have encountered various issues. 

The extension of the deadline to 60 days has helped, however. Although set up problems can still arise, there’s usually far less time pressure for all involved. 

The introduction of a downloadable paper CGT return, for those clients who cannot use the online services, is also very welcome. However, there are large backlogs in the processing of paper CGT returns. This is not only frustrating for clients but adds significantly to the agent’s time costs in chasing HMRC for a response. 

Awareness of the new regime seems to have grown, although we do encounter many clients who have failed to report a disposal within the required timeframe. There also seems to be a lack of awareness amongst other professionals involved in the property disposal, particularly where the transaction involves a lease. 

Going forward, we are likely to see more clients paying CGT, but there’s still scope for careful tax planning to reduce the client’s overall tax exposure.  

Verdict: It’s frustrating accountants cannot manage the entire CGT process on behalf of clients, but there is still scope to help reduce overall tax exposure with careful planning.

Downloading paper returns via HMRC software avoids problems 

Pammi Khaira, Assistant Tax Manager, Monahans 

The following individuals are likely to be affected by the reduction to the CGT annual exemption:  

• Those who sell stocks, shares or other assets subject to CGT
• Those who have second properties (eg buy-to-let landlords)
• Non-residents with a broader range of transactions that fall under the 60-day reporting requirement
• Trustees.

In terms of reporting requirements, any technical issues have tended to stem from setting up the Government gateway accounts by the clients. Where individuals struggle with using the computer or do not have the documents required to set up a Government gateway account, we have found that completing a paper return is more suitable. 

As a business, we’re ensuring we’re updating clients regularly with key information and guiding them through the process to help mitigate any potential issues. Recognising key areas of difficulty also helps to navigate clients through any pitfalls. Paper returns are now much easier to access as these can be downloaded electronically via HMRC software. 

Verdict: Downloading paper returns via HMRC software avoids technical issues associated with CGT tax returns.

Annie Makoff is a freelance journalist and editor.