Capital Gains Tax – Simplifying the tax?

23rd July 2020

On 13 July 2020, Richi Sunak wrote to the Office of Tax Simplification requesting a ‘review of Capital Gains Tax and aspects of the taxation of chargeable gains in relation to individuals and smaller businesses’. He guided that OTS ‘identify and offer advice about opportunities to simplify the taxation of chargeable gains, to ensure the system is fit for purpose and makes the experience of those who interact with it as smooth as possible…….’

Whilst few will be surprised by the need to raise taxes given the extensive support provided through the pandemic, and we have grounds to raise an eyebrow to the ‘simplification’, this extract is perhaps more interesting:

I would be interested in any proposals from the OTS on the regime of allowances, exemptions, reliefs and the treatment of losses within CGT, and the interactions of how gains are taxed compared to other types of income’.

We believe that planning decisions should be driven more by lifestyle choices and individual desires rather than the tax treatment. However, they may be an opportunity to provide a focus on your own planning, ahead of any potential detrimental changes.

The Current Rules

We all receive an annual Capital Gains Tax (CGT) Allowance which means we can receive profits each year on a ‘use it lose it basis’ with no tax due. For 2020/21, the allowance is £12,300.

After the allowance, the tax rate depends upon your wider income position with 10% for a basic rate taxpayer, or 20% for a higher/additional rate taxpayer on most assets, including shares and investment funds. However, sales of second (or more) residential property incurs tax at a rate of 18% or 28%, after the CGT allowance.

Trustees or personal representatives of someone who has died pay 28% on residential property and 20% on other chargeable assets

For those selling a ‘qualifying business’, business asset disposal relief brings a lower rate on the first £1m of Lifetime gains. This replaced the more generous Entrepreneurs’ relief in the 2020 budget from 11 March, which had a lifetime limit of £10 million.

What could change?

  • Nothing – it is not unusual for tax systems to be reviewed and then deferred or disregarded.
  • With income tax rates ranging between 20% to 45%, it is evident that CGT tax rates are comparatively more generous and a ‘wealth tax’ is potentially easier to manage the PR, than increasing income tax rates.
  • The changes to business sales has already set a precedent, and whilst perhaps less likely to see further changes so soon should not be ruled out.
  • As a minimum, we should probably expect the effective ‘tax-free’ CGT allowance not to increase above the current £12,300.

What to do?

It is always recommended that appropriate financial and tax advice is sought. Here are a few situations that may be relevant:

  • It is good planning to look to utilise the annual CGT allowances. Other investment related considerations are needed to ensure this exercise is worthwhile and appropriate.
  • Similarly, assets can be switched between married spouses or civil partners to make use of each other’s CGT allowances.
  • If you are considering making gifts to others, the possible changes may bring a focus to draw a conclusion and make it happen.
  • Similarly, if a business is to be sold, your deliberations should factor in a higher tax charge to ensure that your ‘number’ for negotiation after tax remains appropriate to meet your future lifestyle needs.

Naturally, we can help you assess the implications for your specific requirements, in all of these situations.

Contact HarperLees