Are you protected against future Capital Gains Tax rises?

It is almost inevitable that taxes will have to rise to help meet the potential £391 billion bill the Government has racked up in supporting the British economy through the coronavirus (COVID?19) pandemic. The Office of Tax Simplification (OTS) published a report in November 2020 outlining the policy design and principles underpinning Capital Gains Tax (CGT).

The OTS acknowledged the consultation has been produced in a shorter timeframe and this hints that change to CGT will be on the cards as the Government looks to counteract the escalating deficit caused by the COVID-19 pandemic.

Raising Revenues

In July 2020, the Chancellor of the Exchequer, Rishi Sunak, asked the OTS to carry out a review of CGT. Mr Sunak asked for a review of its use in ‘the acquisition and disposal of property’ and ‘the practical operation of principal private residence relief’. This suggests that reform could be on the cards.

Above an annual exemption of £12,300 (2020/21), CGT is charged on gains at 10% for basic rate taxpayers and 20% for higher and additional rate taxpayers. This rises to 18% and 28% respectively where the gains relate to residential property. Income Tax is charged at a basic rate of 20%, rising to 40% and 45% for higher and additional rate taxpayers.

According to the OTS, 97% of CGT tax revenue is paid by over 35s, with most people caught by the tax in their 50s and 60s. It means that raising additional revenues can be positioned as a tax on those with the broadest shoulders.

Conditions associated with Capital Gains Tax include the following:

• The value of the gain is normally the amount you receive, but gifts and certain sales may be valued at the open market value
• Capital Gains Tax is not normally payable on death

Reforms Package

The OTS has suggested a package of reforms, some of which are tweaks around the edges that will be relatively quick wins and some which will cause a bit of a stir. The prospect of bringing CGT in line with Income Tax has been touted for some time and so that is relatively unsurprising, although it would lead to a significant rise in tax paid by those subject to CGT.

Other proposals, such as scrapping CGT uplift on death, have far-reaching consequences and need to be considered carefully. CGT uplift means that CGT is overlooked when an individual dies and they hold taxable assets that have gone up in value. This is because when the assets are transferred to someone else, normally a spouse or family member, they are ‘re-set’ for CGT purposes. Instead, the assets may be subject to Inheritance Tax.

Annual Exemption

The OTS also suggest lowering the annual exempt amount. Their view is that while small gains should still be exempt in order to avoid administrative hassle for the sake of a minor tax bill, the current allowance results in too many profits being tax-free.

It seems highly likely that changes are on the horizon. And while it is not suitable for everyone to change their financial plans because of mere policy speculation, it is worthwhile reviewing in light of what will inevitably be a more harsh tax environment.

Need guidance on the implementation of proactive planning and mitigation? 

Tax-wrapped pensions and Individual Savings Accounts (ISAs) are just two solutions that are safe from CGT. It is important to fully utilise any unused allowances available and forward planning could help mitigate the tax burden of legislative changes, even if they cannot be eliminated.