After announcing a further £30bn worth of policies and tax cuts in his summer statement, it seems logical to assume that the Chancellor Rishi Sunak is looking for ways to balance the books. The Chancellor’s recent letter to the Office of Tax Simplification (“OTS“) asking them to review capital gains tax (“CGT“) has sparked speculation that this may be one way he is considering raising some much needed funds.
CGT is charged on any profit (the “gain”) made when assets, including property and shares but not sterling currency, are sold, gifted or otherwise transferred. If the total of any gains realised in the year (minus any losses and allowable deductions) exceeds the CGT annual allowance (currently £12,300 for individuals and executors, £6,150 for trustees), the excess is liable to CGT. There are different rates of CGT for individuals depending on the rate at which the individual pays income tax, but the current main rate is 10% or 20% and the upper rate for assets such as residential property which is not your main home is 18% or 28%. Trustees and executors pay CGT at the rate of 20% or 28%. These are historically low considering that CGT once had a starting rate of 40%. Generous reliefs are also available through Principal Private Residence Relief (“PPR“) on your main residence and Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) for business owners, subject to certain thresholds and conditions.
What is being reviewed and when?
The Chancellor has asked the OTS to review CGT specifically in relation to the taxation of chargeable gains by individuals and smaller businesses, and to include their proposals on the current allowances, exemptions, reliefs and treatment of losses, and how gains are taxed compared to other types of income. PPR, ISA allowances, estates in administration and the selling or winding up of unincorporated businesses fall within the scope of this review. The first deadline for high level comments on the principles of CGT is 10 August 2020. More detailed comments on the technical aspects and practical operation of the tax are invited by 12 October 2020, which may allow the Chancellor to include reforms in the expected Autumn Budget, a timetable which suggests immediate change is possible.
What could change?
Although the government has said that the aim of the review is to seek “simplification opportunities” and not to raise revenue, it would be surprising given the current economic climate if CGT is reviewed and the rates not adjusted. CGT is a fairly modest source of revenue for the government raising only £8.8bn in 2017/18, equivalent to a 15% tax rate.
One possibility is to align CGT with income tax rates so that investors pay tax at their highest rate on the disposal of assets, as was the case between 1988 and 2008. There is also speculation that the annual allowance could be reduced, or even eliminated. The option to carry forward losses may be removed, or losses may not be available to offset gains made elsewhere. In a separate review of inheritance tax (“IHT“) last July, the OTS suggested that the rule where gains on assets are wiped out on death (known as the “CGT-free uplift“) could be removed. The CGT-free uplift has been accused of distorting decision making, especially in relation to assets which are exempt from IHT such as certain business assets. Currently where a business is retained until death, any potential gains are wiped out and there is no IHT to pay which makes retaining an asset, rather than passing it on to the next generation at the right time for the business, very attractive. Scrapping the CGT-free uplift could therefore be resurrected.
Despite insistences from the Chancellor that the review is simply “business as usual”, he will be aware of the report from The Institute for Public Policy Research published last September (“Just Tax”) in which it was estimated that the government could raise an extra £90bn over the next five years by taxing capital gains at the same rate as income, and that a further £15bn could be raised over the same period by removing the CGT-free uplift on death.
If you are, or have been, considering making lifetime gifts, passing on assets to the next generation or creating or adding to a trust, now would be a good time to speak to your Wedlake Bell advisor and review your affairs. CGT applies to lifetime gifts, including the transfer of assets into trust, as well as to assets that are sold. It would also be prudent for executors and trustees to seek professional advice on what action, if any, they should take to benefit from the current CGT rates.