It is widely anticipated that the staggering cost of the Government’s Covid-19 assistance packages will in part have to be met by tax increases. What is less certain is just where these increases will occur.
In the last few weeks, however, the Chancellor has given a potential clue by asking the Office of Tax Simplification (OTS) to conduct a wide-ranging review of Capital Gains Tax (CGT), with the OTS issuing a call for evidence a few weeks ago.
CGT is a modest but increasing source of revenue for the Exchequer. In 2017/18 it raised £8.8bn, up 14% on the previous year. The number of CGT taxpayers increased by 3% to 281,000 in 2017‐18, and whilst this is a continuation of a long-term trend pulling more taxpayers into the CGT net, over 70% of all those who paid CGT did so only once in the 11 years to 2017‐18.62% of all CGT came from those who made gains of £1 million or more, which is generally around 3% of CGT taxpayers each year.
Currently, an individual’s capital gains are taxed at 10% where they fall within the basic rate, and 20% thereafter (or 18% and 28% for gains on residential property). Each individual has a CGT annual exemption, currently £12,300, to set against gains before any tax is due. Trustees are subject to the higher CGT rates with an annual exemption that is generally half the individual exemption.
With tax rates significantly lower than the equivalent rates for income tax, many taxpayers and their advisers have adopted investment strategies aimed at using capital growth from accumulated wealth to provide or supplement their income stream. With careful planning and sufficient capital assets, combining the income tax personal allowance and CGT annual exemption can generate a significant level of tax-free income each year. With capital profits providing a higher ‘after tax income’ than earnings or other income sources, and a relatively small number of taxpayers actually having to pay the tax, CGT looks like an obvious target for a Chancellor keen to balance the books while simultaneously encouraging economic recovery and not increasing the tax burden of the average taxpayer.
The past few years have already seen restrictions on a number of valuable CGT reliefs, including the reduction of the entrepreneurs’ relief lifetime allowance, the reduction of the principal private residence “final period” exemption, and the almost complete withdrawal of lettings relief. We have also seen the scope of CGT widened to include the sale of all UK land and property owned by non-resident individuals as well as higher rates of CGT introduced on the sale of residential property.
The OTS has requested responses to its call for evidence by October. It is therefore unlikely that there will be any changes before this autumn’s Budget at the earliest, but past Budgets have implemented changes to CGT legislation with immediate effect, giving taxpayers no time to act or plan for any adverse impacts as a result of the changes.
With this in mind, serious consideration should be given to bringing forward any disposals, either by way of sale or gift, while the CGT treatment is, possibly, more favourable than it might be later this year. There is no guarantee that there will be changes but, if there are, they are unlikely to be favourable to the taxpayer and where plans are already in place, it may be prudent to consider accelerating these for a pre-Budget completion.
As ever, we are here to support our clients through these challenging times and are closely monitoring the situation so we can best advise in the months ahead. If you would like to discuss any of the above opportunities further please contact a member of the tax team or liaise with your regular Rickard Luckin contact.