Possible Changes to Capital Gains Tax
In July 2020, the Chancellor asked the Office of Tax Simplification (OTS) to carry out a review of Capital Gains Tax (CGT). The goal was to identify opportunities relating to administrative and technical issues and areas where the present rules can distort behavior by taxpayers or do not meet their intended policy. On 11 November 2020, the OTS published a 135 page document on its review of the CGT regime which makes 11 specific recommendations. A second report will be published in 2021.
The OTS’ recommendations can broadly be broken down into four main categories: rates and boundaries; the annual exemption; the interaction with inheritance tax; and business reliefs.
Rates and Boundaries
The OTS has suggested that the UK Government should consider more closely aligning CGT rates with the much higher rates of income tax. For additional rate taxpayers this would mean a rate rise from 20% on asset disposals (28% on residential property disposals) to 45%. The OTS report does suggest that the government considers reintroducing a form of relief for inflationary gains (formerly known as indexation relief), as was previously the case when rates of CGT and income tax were much more aligned.
If CGT and income tax were to remain at different levels, the OTS recommends that it would be far simpler to just have two rates of CGT, rather than the current four. It also recommends that income levels are not used to determine CGT rates.
The Annual Exemption
The Annual Exempt Amount is a threshold below which an individual’s overall gains chargeable to Capital Gains Tax in a given tax year are not taxed.
The OTS has recommended reducing the CGT annual exemption from £12,300 to £5,000. Reducing this exemption would almost certainly result in more taxpayers being caught and being required to file Self-Assessment Tax Returns.
Interaction with Inheritance Tax
Under the present rules there are circumstances where a taxpayer can benefit from both an Inheritance Tax (IHT) exemption and a tax-free CGT uplift on death (for example the transfer of Business assets covered by Business Property Relief (BPR)). This means that inherited assets can often be sold straightaway with no CGT arising.
The OTS recommends that a taxpayer should not get both an IHT exemption and a CGT uplift on death and suggests that a less distortive alternative to the death uplift could be a ‘no gain no loss’ approach, where (except in relation to a person’s main or only home) the recipient is treated as acquiring the assets at the historic base cost of the person who has died. This approach would make transfers in life and on death more neutral.
Currently an individual can dispose of a qualifying business asset and be eligible for reliefs such as Business Asset Disposal Relief (BADR), formerly Entrepreneurs Relief, or Investors’ Relief, which both attract a lower CGT rate of 10%.
The OTS recommends replacing BADR with a relief purely focused on individuals who are retiring. This could be done by increasing the requisite qualifying shareholding to perhaps 25% of the unquoted trading company, possibly increasing the holding period to 10 years or reintroducing an age limit for obtaining the relief.
The OTS recommends that the government should abolish Investors’ Relief which was introduced in April 2016 on the basis that there has been little interest in using this relief.
Although it is probably unlikely that all the recommendations made by the OTS will be adopted, the recommendations, if implemented, could raise billions of pounds of extra revenue for the government to help fund its response to the coronavirus pandemic. I would not, therefore, be surprised to see some CGT reforms in the March 2021 Budget
If you want some advice regarding the possibility of crystallizing current unrealised gains contact the Private Client Tax team at Wheelhouse Advisors Limited.Back to articles