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Taxing times on the horizon!

Are you protected against future Capital Gains Tax rises?

It is almost inevitable that taxes will have to rise to help meet the potential £391 billion bill the government has racked up in supporting the British economy through the coronavirus (COVID-19) pandemic.

Investors handed over £9.5 billion to HM Revenue and Customs via capital gains duties in the year to April 2019, a record haul for the Government. Subsequently, the Office of Tax Simplification (OTS) published a report[1] in November 2020 outlining the policy design and principles underpinning Capital Gains Tax (CGT).

Shorter timeframe

The OTS acknowledged that the consultation has been produced in a shorter timeframe and this hints that change to CGT will be on the cards as the Government looks to counteract the escalating deficit caused by the COVID-19 pandemic.

“97% of Capital Gains Tax revenue is paid by over-35s, with most people caught by the tax in their 50s and 60s”

In July 2020, the Chancellor of the Exchequer, Rishi Sunak, asked the OTS to carry out a review of CGT, to ‘identify opportunities relating to administrative and technical issues as well as areas where the present rules can distort behaviour or do not meet their policy intent.’

Distorted behaviour

Mr Sunak asked for a review of its use in ‘the acquisition and disposal of property’ and ‘the practical operation of principal private residence relief’. This suggests that reform could be on the cards. The first report found ‘many features of CGT which can distort behaviour, including its boundary with Income Tax and interconnections with Inheritance Tax.’

The report said that ‘more closely aligning CGT rates with Income Tax rates has the potential to raise a substantial amount of tax for the Exchequer.’ A second report, which will follow early this year, will explore key technical and administrative issues.

Raising revenues

Above an annual exemption of £12,300 (2020/21), CGT is charged on gains at 10% for basic rate taxpayers and 20% for higher and additional rate taxpayers. This rises to 18% and 28% respectively where the gains relate to residential property. Income Tax is charged at a basic rate of 20%, rising to 40% and 45% for higher and additional rate taxpayers.

According to the OTS, 97% of CGT tax revenue is paid by over 35s, with most people caught by the tax in their 50s and 60s. It means that raising additional revenues can be positioned as a tax on those with the broadest shoulders.

Conditions associated with Capital Gains Tax includes the following:

  • You can carry forward losses from previous years
  • Capital Gains Tax arises on disposal of an asset – normally on sale, but gifts, insurance claims or compensation for losses can be chargeable disposals
  • The value of the gain is normally the amount you receive, but gifts and certain sales may be valued at the open market value
  • Capital Gains Tax is not normally payable on death

Reforms package

The OTS has suggested a package of reforms, some of which are tweaks around the edges that will be relatively quick wins and some which will cause a bit of a stir. The prospect of bringing CGT in line with Income Tax has been touted for some time and so that is relatively unsurprising, although it would lead to a significant rise in tax paid by those subject to CGT.

Other proposals, such as scrapping CGT uplift on death, have far-reaching consequences and need to be considered carefully. One of the biggest challenges of tinkering with the CGT system is its interaction with several other parts of the tax system, in particular Inheritance Tax, so many changes can be complex and have knock-on consequences for other parts of the tax system.

Inheritance Tax

CGT uplift means that CGT is overlooked when an individual dies and they hold taxable assets that have gone up in value. This is because when the assets are transferred to someone else, normally a spouse or family member, they are ‘re-set’ for CGT purposes. Instead, the assets may be subject to Inheritance Tax.

The OTS recognise that this means some people may hold on to assets until they die for the tax benefits. Removing or limiting this relief could be seen as a way to encourage wealth transfers to happen earlier, as well as raising significant funds.

Annual exemption

The OTS also suggest lowering the annual exempt amount. Their view is that while small gains should still be exempt in order to avoid administrative hassle for the sake of a minor tax bill, the current allowance results in too many profits being tax-free.

It seems highly likely that changes are on the horizon and, while it is not suitable for everyone to change their financial plans because of mere policy speculation, it is worthwhile reviewing in light of what will inevitably be a harsher tax environment. If adopted, the recommendations by the OTS could have a significant impact on some investors, company directors and buy-to-let property owners when realising gains.

Need guidance on the implementation of proactive planning and mitigation?

Tax-wrapped pensions and Individual Savings Accounts (ISAs) are just two solutions that are safe from CGT. It is important to fully utilise any unused allowances available and forward planning could help mitigate the tax burden of legislative changes, even if they cannot be eliminated. Speaking to us will give you the best opportunity to utilise these opportunities.

Source data:

[1] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/935073/Capital_Gains_Tax_stage_1_report_-_Nov_2020_-_web_copy.pdf

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