Capital Gains Tax review advises overhaul of current system to help balance the books
Owners of second properties, or other disposable assets such as shares and securities, could face higher Capital Gains Tax bills in the future after the Office for Tax Simplification recommended increasing rates and cutting allowances as part of a review commissioned by chancellor Rishi Sunak.
You may recall we flagged this as a possibility on the "Market Musings" podcast back in July (link and article here), when Tom spoke of the need for the government to fund COVID relief and that Capital Gains Tax, or CGT was an obvious place for them to start.
What is CGT?
HMRC define Capital Gains Tax as a "tax on the profit when you sell (or 'dispose of') something (an 'asset') that's increased in value. It's the gain you make that's taxed, not the amount of money you receive".
These assets include but are not limited to, personal property worth more than £6,000, second homes, buy to let or investment properties, business assets, and the sale of shares and securities in both listed and unlisted companies.
Currently individuals are allowed to make £12,300 in capital gains in a tax year before paying any CGT. CGT Rates are currently set at 10% Basic Rate and 20% Higher Rate, (18% & 28% for property). So if you are a basic rate tax payer with say £10,000 of capital gains (after the £12,300 allowance), arising from the sale of listed shares, then your CGT bill would be £1,000. If it were property, the bill would be £1,800 (n.b you main residence is generally exempt from CGT)
Why Change it?
CGT has long been considered a disproportionately lower tax compared other taxes in the system. Although not always the case, there is a tendency for individuals with capital gains to be towards the top of the basic rate band or into the higher rate band whereby they are paying generally upwards of 40% on their other income.
Additionally there is evidence of individuals adapting behaviour to take advantage of the allowances, be that over a few years, or restricting gains to just under the CGT allowance.
It is estimated that with some reform, CGT could raise an additional £14 Billion a year for the treasury, although again it is acknowledged in the review that the sum is likely to be lower as individuals will again adapt behaviour to the new rules.
What changes are being considered?
Potentially reduce the annual CGT allowance from £12,300 to between £2,000 and £4,000
Potentially increase the rates of CGT closer towards the rates of income tax
Further reform of Entrepreneurs relief (recently reduced from a lifetime allowance of £10 million, to £1 million), with implications for retiring business owners
Scrap capital gains uplift - where an individual inherits an asset at market value o the date of death, rather than the value at date of purchase. (E.G If I inherit a property worth 200K on the date of the death of the person I inherit the property from, and then sell the following week for £200K, then I have no capital gain. However, if that property was initially bought for say £100K by the deceased, then the proposal is to use that initial cost as the base cost, rather than the "at death" value. In that instance I would have made £100K gain.
What can be done?
No decisions have been made by the government yet as to how much of the proposals they will implement, but given the huge deficit they are facing post COVID, it seems very likely CGT will be reformed. It is still unknown how far the reform will reach and whether all of the above proposals will be adopted, or just a couple.
Irrespective for individuals with investments, it is worth taking the time to read the link from our July article (here), which talks about tax free wrappers, such as ISA's and SIPP's for your investments and the rules around them as this will offer a degree of protection (although not particularly for property).
With regards to property, this may push landlords even further down the route of moving properties into companies where the tax treatment is different, but again there are likely both CGT and stamp duty implications in doing so and it may not be suitable for everyone.
The key is preparation and forward planning, and the window for taking action may closing as the government look to start clawing cash back.
If you need to talk to someone about the tax treatment (and potential tax treatments) of your investments then don't hesitate to get in touch.