A capital gains tax overhaul?

A capital gains tax overhaul?

This article outlines and considers some of the key proposals contained in the recently published review into capital gains tax ("CGT"). The review hints at just one of the ways in which the Chancellor may implement tax rises to pay for the spike in Government borrowing following the outbreak of Covid-19.

Impetus for change

In its attempt to steer the economy through the coronavirus pandemic, the Government spent nearly £300bn in 2020. Last month, the Office for Budget Responsibility predicted that the combination of measures, including job support schemes, business loans and increased NHS spending, will put Government borrowing at a record £394bn by the end of the current financial year. With the country plunged into another national lockdown this month, we can expect the final figure to be a lot higher.

It is perhaps no surprise then that reports of tax rises to pay for this unprecedented spending-spree have begun to surface. A Chancellor commissioned review into capital gains tax ("CGT") was published recently, containing a number of potential changes to the current CGT regime.

Proposed transformations

Carried out by the Office of Tax Simplification ("OTS"), the review sought to identify how CGT could be made simpler and fairer. It is a notoriously complex area of law and calls for simplification are nothing new. For example, there are currently four different rates you might have to pay, depending on the asset and which income tax band you fall into.

The OTS's most radical proposal is to align CGT rates with those of income tax, resulting in fewer rates and a more understandable system. Currently, basic-rate taxpayers pay 10% CGT on assets and 18% CGT of property, whilst higher-rate taxpayers are charged 20% on assets and 28% on property. These rates are considerably less than income tax rates, which are 20% and 40% respectively. A new flat rate of tax that brings CGT in line with income tax could, accordingly, see CGT levies doubling for some.

Another issue identified by the OTS is the relationship between inheritance tax (IHT) and CGT, particularly the rules around CGT uplift. Currently, there is no CGT on assets transferred on death and the beneficiary inherits the asset at its market value. Consequently, if a beneficiary sells an asset for a profit, CGT calculated based on the difference between the value of the asset when they received it and the amount it was sold for, not on the price the deceased bought it for. This is likely to significantly reduce the amount of CGT paid and is known as "rebasing". To alleviate this, the OTS have suggested either abolishing CGT uplift completely (but also rebasing all assets to the year 2000), or preventing those who inherit assets that are exempt from IHT benefiting from CGT uplift as well.

A further major change recommended by the OTS is the reduction of the annual exemption (i.e. the amount of profit someone can make from disposing assets before paying tax) from £12,300 to between £2,000 and £4,000. It is reported that this would increase revenues by somewhere between £500m and £900m and result around 300,000 more people having to pay CGT.

Preparing for change

Whilst the Government does not have to take the recommendations offered by the OTS, it must find a way of filling the enormous deficit caused by the coronavirus pandemic.  It is almost an inevitability that taxes will have to rise, and the publication of this review suggest that CGT is very much on the Government's radar.  

Now may, therefore, be as good a time as any to consider your estate and potential tax saving options in relation to the disposal and management of your assets. To find out how more please contact one of our specialist lawyers by email, or call us on 020 7222 5381.