There is no certainty that recent proposals to increase CGT and expand its scope will be implemented in full by the UK government, but the author of this article says the chance of such a change must be taken seriously. Private clients must prepare, and now.
The UK government, along with so many others, is under pressure to raise revenues to try and repair public finances that have been hammered by COVID-19. At the same time, policymakers say they want to tidy up complex tax systems – a long-standing refrain. A few days ago in the UK, proposed changes to capital gains tax to make it simpler and put it in line with income tax provoked an uproar. Critics said the changes, if the UK government enacts them, would draw in far more people into the tax net, including a broad swathe of the middle class.
To discuss what to do about any potential CGT changes is Simon Mitchell, a partner in the private client team at South East law firm Thomson Snell & Passmore. He has particular expertise in tax planning, wills and trusts.
The editors are pleased to share these views; the usual disclaimers apply about the views of outside contributors. To enter the debate, email email@example.com and firstname.lastname@example.org
On 11 November, the Office of Tax Simplification published a report into the future of capital gains tax and the ways in which it could potentially be reformed. The report was commissioned by the government in July 2020 and follows on from a previous report published by the OTS in 2019 in which CGT was also mentioned. Whilst the publishing of the report does not by itself change any of the rules relating to capital gains tax, it is worth looking at the recommendations that the OTS has made given that they could be influential on the way in which the government might act.
By way of background, CGT is a profits tax that is paid on the profit (or capital gain) which is generated when an asset is sold for more than its acquisition value (whether the asset was originally bought, received as a gift or inherited). CGT typically applies to sales or disposals of investment properties, shareholdings and other investments but does not apply to gifts of cash. There is also an exemption covering a taxpayer's main residence as well (although couples or civil partners may only have one main residence between them). If a taxpayer dies owning assets which are pregnant with gains, those gains are washed out as a result of the death so that the beneficiary who inherits the assets would be liable for CGT only from the date of death onwards and not for any earlier period.
There are also various different rates of tax that apply for CGT purposes depending on the circumstances. As with income tax, there is both a basic rate and a higher rate for CGT purposes, the rates being 10 per cent and 20 per cent respectively, though the equivalent rates for residential property transfers are slightly different (18 per cent and 28 per cent respectively).
Overall, this means that the higher rate of tax for CGT purposes is some way below the higher rate of tax for income tax purposes (which can be either 40 or 45 per cent depending on the taxpayer’s circumstances). When a disposal is made, not all of the gains are subject to tax because each taxpayer has an annual exemption for CGT purposes (currently £12,300), so it is only the gains in excess of this allowance which would be subject to tax during the course of the tax year in any event. All of the tax rates and figures mentioned above are for the tax year 2020/2021.
The report from the OTS outlines various ways in which the government could consider reforming CGT and, in particular, has highlighted the following recommendations:
1. Increasing the rates of tax that apply for CGT purposes so that they are more closely aligned to the equivalent rates of tax that apply for income tax purposes (and in the process, consider reducing the number of rates of tax that apply for CGT purposes);
2. Reducing the annual exemption for CGT purposes so that it acts purely as a de minimis provision and not as a wider tax allowance; and
3. Removing the CGT uplift on death so that when a beneficiary inherits assets, the pre-death gains would remain relevant and would therefore be taxable when the beneficiary later sells or disposes of it.
These are by no means the only recommendations, and there are some more positive suggestions that have been made as well. For example, where assets were acquired before March 1982, the acquisition value of that asset will be its value in March 1982, with no need to go back any further than that. Given the length of time that has now passed since 1982, the OTS report suggests that if the government removes the CGT uplift on death, it should also consider a change to the rebasing rules so that they apply with effect from the year 2000 rather than from March 1982. If put into effect, the effect on disposals of assets which have been held for some time prior to 2000 could be significant.
There is no guarantee that the government will necessarily adopt any of the recommendations that have been put forward by the OTS, but given that the government commissioned the OTS to provide the report, the position clearly has to be taken seriously. For this reason, and especially bearing in mind that property and other markets have been uncertain this year because of the COVID-19 pandemic, and that the government needs to raise extra revenue to cover the costs of the pandemic, now may be a good time to consider making disposals of assets to avoid being caught by any new rules that might be imposed for CGT purposes.