Proposals to change the UK's capital gains tax system will, private client advisors and academics claim, widen the tax net considerably, hitting entrepreneurs and inheritors, among others. It shows how measures to raise revenues for governments hit by the COVID-19 crisis are going to be major political battleground in coming years.
Earlier this week – as reported here – the UK’s Office for Tax Simplification proposed changes to the capital gains tax regime. CGT could rise to align with income tax and hence draw thousands more people into the tax net. As bills for COVID-19 and the lockdowns roll in, we can expect governments to try and increase revenues, even under the banner of “tax simplification.”
Against that, governments know that raising tax rates when they are trying to encourage economic growth after a pandemic might seem perverse.
Here are comments about the CGT proposals from wealth managers, lawyers and other advisors.
UHY Hacker Young, the national accountancy group, said the OTS has suggested these changes:
Reducing the annual tax-free amount for CGT to as little as £1,000; making employee shares granted through share schemes subject to higher levels of CGT – and therefore less attractive; double-taxing heirs (both CGT and IHT) on some inherited assets like second homes; potentially letting individuals write off risky investment losses against their income tax bills – even creating the opportunity for HNW individuals to pay no income tax if they have lost money on speculative trades; and making capital held in a company by entrepreneurs to fund their retirement subject to CGT.
“Today’s OTS proposals would essentially upend much of the tax system. Considering the amount of disruption, it’s hard to see how this would create a more user-friendly CGT system,” Graham Boar, Partner at UHY Hacker Young, said. “The proposals seem designed to increase tax revenue and add complexity rather than simplify CGT. They would also create some huge winners and losers. We think the OTS proposals for changes to how employee share schemes are taxed are a negative. This is a vital relief that plays a big role in helping businesses retain their best staff. Along with the suggestion of making entrepreneurs pay CGT on capital saved in their business for retirement, these proposals could easily be seen as an attack on business.
Institute of Economic Affairs senior academic fellow, Professor Philip Booth said: "It is a fundamental error and misunderstanding of the principles of taxation to suggest that the rates of capital gains tax and income tax should be aligned. Capital gains tax is often a 'double tax.' For example, when share prices increase because investors anticipate higher future profits, capital gains tax is charged when the asset is sold and then when higher profits are themselves taxed. The same happens when companies retain profits.” (The IEA is a free market think tank.)
"Instead, the Treasury could look hard at the OTS's second option - ensuring that income and profits are not disguised as capital gains and thus taxed at lower rates. It should also look at those economic activities which manage to fall outside the tax system altogether. "Capital gains tax is a highly damaging tax; raising rates would be a serious mistake and create more economic damage,” Booth said.
Katharine Arthur, head of private client at accountancy firm haysmacintyre: “The Office for Tax Simplification’s (OTS) proposed changes to CGT would involve a significant re-write of the existing legislation. Bringing the current rate in line with income tax rates could see business owners among those most affected by the proposed changes, with the CGT rate potentially doubling, or in some instances, quadrupling, on the sale of a business.”
“What’s more, the proposed removal of CGT uplift upon death could see those who inherit second homes (or other assets) facing an increasingly hefty gains tax bill should they sell the property – perhaps a step from the OTS to encourage people to gift assets earlier on in life, rather than hang onto them. While there is no guarantee that the government would follow all or any of the OTS’ recommendations, it may be that given the strain the economy is under, these steps could be deemed necessary. Like any tax, CGT has evolved over the years, and it is important that it is as simple and fair as possible. It will be interesting to see what the second report of the OTS review will bring in due course.”
Law firm Boodle Hatfield said that the proposals on assets being inherited could also lead to a large tax charge being imposed where no IHT is currently due and to both CGT and IHT being imposed in some cases. It said if a person inherited a home that was purchased by their parents for £250,000 and had subsequently increased in value to £1 million, the heir could be taxed on the entire £750,000 gain if they sold the home. It said the OTS report does not clarify how the proposals would interact with principle private residence relief.
“These proposals could be terrible for anyone inheriting a high-value asset like a home from their parents. The CGT bills could be enormous for many of them. Under the proposals entrepreneurs would also see their tax liabilities increase dramatically. The Chancellor should think long and hard about the effects on ordinary people before adopting these proposals,” Kyra Motley, partner at Boodle Hatfield, said.