Proposal to raise Capital Gains Tax - a taste of what's to come?
In July 2020, the Chancellor of the Exchequer, Rishi Sunak, wrote to the Office of Tax Simplification (OTS) to enquire as to how Capital Gains Tax (CGT) could be simplified and made fairer.
The possible changes have been suggested after CGT receipts soared nationwide due to market uncertainty amidst the ongoing COVID-19 pandemic - in November 2020 receipts rocketed to £92million compared to £5million for November 2019. Although there are several reasons why receipts have shot up by so much, one fact being suggested, is that people are selling off assets for fear that CGT rates will rise.
In order to achieve the objectives suggested by the Chancellor, the OTS will need to come up with a solution that is likely to affect the way both individuals and businesses operate and view Capital Gains Tax.
What is CGT and how might it be changing?
Capital Gains Tax is a tax on any profit you have made on the disposal of an asset and it applies to most assets when they are sold. The rate of CGT varies depending on the asset and/or who is selling it. There are some exceptions, for instance you do not pay Capital Gains Tax on personal possessions sold for £6,000 or under and in the 2020/21 tax year, the first £12,300 of this type of profit is exempt from any taxation – the CGT allowance.
The Chancellor suggests changes need to be made to make the CGT process simpler and fairer. There are a number of ways the OTS could make these changes, including aligning CGT rates with income tax rates. This is no surprise as the the current process favours higher earners who can use CGT to lower the tax they pay on their income as the highest rate of CGT is 28%, compared with the highest income tax band of 45%.
These suggestions coupled with the fact that the UK economy needs to be repaired after the growing budget deficit and the market shock that the coronavirus outbreak caused, mean that it is possible that CGT rates will rise. With this thought in mind, it’s no surprise that many business owners and shareholders have sold off assets and prepared their CGT returns in anticipation of the rises – which means in turn, as we mentioned above, CGT receipts have substantially increased this tax year.
Another way the OTS could decide to implement change, would be to revise the exemptions from Capital Gains Taxation. These exemptions include the £12,300 allowance stated previously, as well as the sale of one’s main residence being exempt from CGT, amongst others. Reducing these exemptions will release wealth from assets such as houses or investment accounts in the hope of stimulating the economy and reducing the budget deficit.
What should I do if I'm worried my tax bill will increase?
Although the immediate solution would seem to be to rush into selling assets in order to make use of the current CGT rules, there are many things that must be assessed before embarking on a mass sale of assets. For example, would selling these assets be financially beneficial in the long run and does the seller have the capacity to pay off a large tax bill.
That said, individuals with investment portfolios should take a look at their portfolios to consider utilising allowances on potential realised gains or make gifts to crystallise gains. Business owners who have an uncertain exit strategy or uncertain financial position are likely to be hesitant to make a third-party sale during this window of potentially lower CGT rates but could instead consider looking into employee ownership to lower the potential tax position.
Although the possible changes to CGT have not been finalised it is beneficial to at least consider utilising this potentially limited window of opportunity before the changes may be made. At TPO we can help you make the most of the current CGT legislation, help you plan for potential changes and how these changes may affect your financial position.
If you’d like to understand how you might be affected by capital gains tax our experts can help you. Get in touch today and arrange a free consultation.