The Government has recently announced its request for a review into Capital Gains Tax (‘CGT’), to be undertaken by the Office for Tax Simplification (‘OTS’).
In 2017-18 the Treasury’s receipts from CGT made up less than 5% of the total amounts received in taxes that year. However, following the Covid-19 pandemic and the consequential financial measures introduced to steady the economy, the national debt is expected to increase to £300bn for 2020-21. As a result, the Government will need to carefully consider options for increasing tax receipts to assist with repaying the national debt.
Many people will never pay CGT, however this is partly due to the favourable treatment offered to taxpayers, whereby significant gains may be realised on a broad range of assets that are entirely relieved or chargeable to a low rate of CGT.
Despite this, there are very few reasons as to why such broad and favourable tax treatment is offered to taxpayers in relation to CGT. Resultingly, we assume that this is and will continue to be an area of focus for the Government.
Below, we discuss the areas of CGT that the OTS may focus on and make recommendations in relation to.
The chargeable rate
Currently, there are 4 chargeable rates of CGT. These are:
|10%||All assets where gains are realised up to basic rate income tax band; and, where the taxpayer qualifies for Entrepreneurs’ Relief|
|20%||All assets where gains are realised in excess of basic rate income tax band|
|18%||Gains realised on residential property up to basic rate income tax band|
|28%||Gains realised on residential property in excess of basic rate income tax band|
Notably, the CGT rates are lower than the income tax rates.
It could be suggested that the CGT rates are aligned with income tax rates. This would assist in simplifying the system, alongside reducing any motivation for taxpayers that seek to implement arrangements, which seek to disguise income as capital.
Principle Private Residence Relief
The existing system provides for 100% relief against any gains realised on a main residence. As a result, with exponential growth in property values in certain areas of the country, some homeowners have realised significant gains.
Arguably, this could be reformed, and a cap added to the amount of gains that may be relieved, alongside preventing serial purchasers buying and selling property and sheltering any gains made under principal private residence relief.
Each of us currently has an annual exemption of £12,300 for capital gains. This usually means that there is no need to declare small gains to HMRC.
In the current economic climate, it may not been seen as fair that people who have capital to invest can benefit from this tax exemption (in addition to the usual income tax personal allowance) whereas those without cash to invest cannot. So the annual exemption may be pruned back or removed.
Overall, it’s clear that changes to CGT will be warmly received in some quarters, and less so in others.
However, many will hope that the CGT goalposts are not moved again until the economy has recovered.
Non-Residents Disposing of UK Assets
Generally, non-UK residents do not pay CGT on the disposal of assets, even where they are situated in the UK, other than direct or indirectly held UK land or property, following recent changes in 2019.
The UK attracts a significant amount of overseas investment and therefore, it may be prudent for the OTS to consider extending the non-resident CGT rules to include all UK situated assets, or specific assets, such as shares.
Overall, such a revision could significantly assist in raising revenue.
CGT on death
Currently, capital gains tax and inheritance tax dovetail whereby an asset is taxable to one tax and the other tax is relieved. On the death of an individual, CGT is relieved in full against the estate (as IHT is chargeable). Alongside this, any beneficiary of the estate will receive a tax-free uplift of the base cost of the assets on the date of transfer. Instead of offering a tax-free uplift, transfers of assets could instead be made on a neutral basis and the beneficiary inherit the base cost of the asset.
It is foreseeable that there could be issues relating to quantifying the underlying base cost of the inherited asset(s). However, it could be suggested that the neutral transfer applies to certain assets, such as shares, where it is likely that the underlying base cost of the asset could be obtainable.
If you have any queries in relation to Capital Gains Tax, then please get in touch.