Significant changes to Capital Gains Tax could be in the pipeline this spring following a report from the Office for Tax Simplification (OTS), writes Pearson May partner Jacqui Bowden.
Chancellor Rishi Sunak commissioned the report back in July 2020, asking the OTS to consider the scope of the tax and the rates which apply, as well as the reliefs, exemptions and allowances.
He is looking for ways to claw back a £210bn hole in public finances after loosening the purse strings to protect jobs and businesses amid the Covid-19 pandemic. He is, however, under no obligation to accept the OTS recommendations.
Capital Gains Tax (CGT) in the UK is currently charged at 10% and 20% for most taxable assets, or 18% and 28% for residential property that is liable to CGT e.g. second homes/rental properties etc.
CGT raised more than £9.5bn for the Treasury in 2018/19 and is on course to fetch roughly the same figure in 2019/20. But the OTS suggested ways that could triple the number of people liable for the tax. Its suggestions included the following:
Align CGT with Income Tax rates
The current CGT rates are lower than the 2020/21 Income Tax rates around the UK. Income Tax in England, Northern Ireland and Wales is charged at rates of 20%, 40% and 45%, with different rates and bands applying in Scotland.
“This disparity is one of the main sources of complexity”, the report found, often “distorting business and family decision-making and creating a tax incentive for people to recharacterise income and capital gains”.
The OTS suggested that aligning CGT rates with Income Tax rates could raise an estimated £14bn a year for the Treasury, with higher and additional-rate taxpayers footing most of the bill.
More than 275,000 people paid CGT in 2018/19, with 40% of those payments coming from wealthy individuals who made gains of £5m or more.
Cutting the tax-free allowance
The report also recommended reducing the CGT annual exemption – currently set at £12,300 for 2020/21 – and replacing it so that it only covers asset price increases that are equivalent to inflation.
This threshold is expected to increase to £12,500 for 2021/22 as things stand, but a reduction from next year’s figure to £12,000 is estimated to affect around 50,000 taxpayers who reported net gains close to the threshold and effectively used up the allowance.
The OTS said lowering this allowance to £5,000 would double the amount of people who pay CGT, while reducing it to £1,000 would almost treble the number of individuals liable to CGT. Should the Chancellor drastically lower the annual exemption, many more people would have to file annual personal tax returns through self-assessment.
Capital transfers
The report also highlighted a “practical overlap” between CGT and Inheritance Tax – “as most of the assets liable for capital gains tax can also attract inheritance tax”. For example, if someone inherits a £300,000 investment portfolio which was acquired by the deceased for £90,000, the £210,000 gain is extinguished on death and the £300,000 figure used as the beneficiary’s base value if they then go on to sell the portfolio.
The report urged the Treasury to remove this capital gains ‘uplift’ on death and instead treat the inherited assets at the historic base cost of the asset.
Steps to consider now
Each individual’s circumstances will be different and, as always, specific advice is essential. It could well be worth considering using the annual exemption before April 5, 2021, where you have any assets liable to CGT and have not already used your exemption.
Those with assets that would trigger a capital gain on any sale and could increase in value over the coming years may want to consider passing such assets to the next generation or other family members but that in itself can often trigger a CGT charge.
The use of Trusts could be considered in such situations, which can defer such CGT charges but there are other considerations to be made and Inheritance Tax would also need to be considered.
It would be unwise to act solely on policy conjecture but due to the financial effects of the virus and the Spring Budget being confirmed for March 3, we know tax changes are afoot. It is, therefore, worthwhile to review any assets, in light of what will inevitably be a harsher tax environment in the future.
The above is for general guidance only and no action should be taken without obtaining specific advice.
