Capital Gains Tax – is it time for action?
Rishi Sunak has asked the Office for Tax Simplification (OTS) to review Capital Gains Tax (CGT). This has set alarm bells ringing for us, as we have long suspected an increase to this tax may be on the cards and it poses important questions for investors.
This isn’t the first review requested of the OTS in recent years. They have already conducted two reviews of Inheritance Tax - recommending fairly dramatic changes - which are gathering dust at present.
However, the coronavirus pandemic is now wreaking havoc with public finances, with huge gaps that will at least partly need to be plugged by tax rises. Given that-
a) the Conservatives made a manifesto pledge not to raise income tax, national insurance or VAT
b) main rates of CGT are currently half those of income tax and
c) most people aren’t affected
-it would seem to make sense for the chancellor to raise money here.
At this point we don’t know when the review will be completed, or when - if ever - the Chancellor will be prepared to act on it. Any changes are likely to come in a budget, the next one being in the Autumn (usually early November).
Potential Changes
There are multiple ways in which CGT could be amended to raise revenue from investors:
The most obvious being increasing the headline rate. Indeed, the Chancellor’s letter to the OTS, requests they report on “how gains are taxed compared to other types of income”. CGT is currently charged at 10% for basic rate payers and 20% for higher[1]. The main rates of income tax are double at 20% and 40% respectively.
The annual exemption to CGT (currently £12,300) could be scrapped – potentially with the personal allowance being amended to cover capital gains too – or reduced to a de minimis level, similar to the £2,000 dividend allowance.
Entrepreneurs’ Relief - reduces CGT to 10% on the disposal of qualifying business assets - has already been limited to £1m of lifetime gains (down from £10m). There have been many calls for it to be scrapped all together.
Principle Private Residence relief – currently all gains made on a main residence are CGT exempt. There have been some suggestions that this relief should be limited, say to gains of £200,000 per transaction.
The aforementioned OTS review of Inheritance Tax recommended changing CGT treatment on death. Currently the purchase cost of assets is uplifted to the value at death, wiping out taxable gains accrued in lifetime. Removing this uplift could now potentially crop up in a second tax review in succession.
Planning Conundrum
This leaves investors – and us as advisers – with some potentially difficult decisions to make where large unrealised gains are held. The question is whether or not to realise gains now, paying tax at a known (possibly lower) rate, to avoid a potential tax increase that we don’t know will actually happen.
This decision is particularly complex with older clients who are planning to hold assets through to death. If we knew the cost uplift on death was to remain, then increased CGT rates aren’t too much of a problem in isolation. However, if CGT rates increase AND the uplift on death is removed, then there will be a large increase in CGT due and people may come to regret not taking gains at the lower rates when they were available.
If advanced warning is given of rule changes it shouldn’t be a problem. However, announced changes could be applied immediately – when higher rate CGT was increased by 10% in June 2010, the rules were applied “as of midnight last night”.
Action
We have begun the processes of analysing each of our client’s unrealised gains and outlining the options. The final question between ourselves in Collingbourne as always being, “what would we do if we were the client?”. We will be putting the options to each client, prior to the budget.
If you have any concerns over the capital gains tax position of your assets, or your financial planning in general, please do get in contact with us for a discussion.
[1] Plus 8% surcharge on residential property.
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