As with any tax and financial topics, capital gains tax can be a little daunting for those who aren’t familiar with it.
In this article, we’re going to teach you that it doesn’t have to be scary. We’ll show you what you need to know so you can tackle it head-on in future.
What is capital gains tax?
Simply put, capital gains tax is a lump sum taken from any profit you make on a capital item, such as a property.
Other capital items that are affected by capital gains tax include businesses, units in unit trusts, and shares.
When does capital gains tax apply?
You’ll see capital gains tax crop up in the same financial year that your capital item is sold. This is almost always the final agreed sale date, not the date when a settlement was arranged.
This is particularly relevant when you make a sale towards the end of a financial year, as the capital gains tax will fall into the following year if that’s when the sale is actually agreed upon.
How much capital gains tax will you pay?
There isn’t actually any set rule on how much you have to pay. The tax is calculated on any difference between the sale price, minus any expenses such as solicitor fees, commissions, and the purchase price, including any purchase costs such as stamp duty and building inspections.
After you’ve worked out your actual gain, it’s halved for any assets held for over 12 months. This discounted gain is then made part of your tax return as taxable income, alongside any other income you might have. From this, the normal tax rates apply.
When do exceptions apply to capital gains tax?
The main exception you’ll come across is if a property is listed as your principle place of residence, as the sale of a family home is free from capital gains tax.
If you’re selling a property with land that’s over 2 hectares, not all of the land is going to be exempt. In addition, gifting a property to a family member typically doesn’t exempt you from the tax either, apart from certain circumstances such as wills or during a family breakdown. The sale price of a property that’s gifted will be worked out based on the current market value.
How can you minimise capital gains tax?
You can work to reduce the amount you have to pay capital gains tax on by recording any costs in relation to the property during the period that you’ve owned it.
To make sure that you’re on track with everything, it’s worth speaking with a qualified accountant. They’ll be able to ensure that you’ve got all of your records in order and they’ll also be able to help with the sale of the property by maximising the deductions you make.