Earlier this year the Government asked the Office of Tax Simplification (OTS) to review Capital Gains Tax (CGT) with a view to simplifying the system and addressing any areas where the existing rules can distort taxpayer behaviour.
Whilst the Government are under no obligation to adopt these recommendations, the proposals would impact individual’s financial plans – especially those looking to transfer wealth to their family.
Here we look at the 5 major possible changes:
Aligning CGT rates with income tax rates
The main recommendation of the review was to align CGT rates with those of income tax. This would result in the main rates of 10% and 20% doubling to 20% and 40% and is likely to result in an increase in an individual’s CGT bill on disposal of an asset.
We would likely see the return of indexation relief which would ensure that tax is only paid on gains in excess of inflation, rather than on the entire profits.
A reduction in the Annual Exemption
Currently CGT is only due on capital gains in excess of the Annual Exemption (currently £12,300 in 2020/21). The OTS feel that this is too generous and feel that a reduction to somewhere between £2,000 and £4,000 would still keep most gains free of CGT.
A reduction like this would increase the tax due and reduce the opportunity to sell some assets each year to minimise any tax due.
Flexible use of losses
Any loss made on the sale of an asset can currently be carried forward indefinitely and used to offset future capital gains. However, if you rarely realise capital gains, relief for capital losses is hard to achieve.
Aligning CGT rates with income tax would make it possible for any capital losses to be offset against income. The report also suggests the possibility of allowing losses to be carried back to allow tax to be reclaimed against capital gains from earlier tax years. This would be a definite advantage over the present system.
CGT on death
There is currently no CGT paid on assets held upon death and the beneficiary inherits the assets at their value at the date of death.
We may find that in the future, this changes to a no gain no loss basis. This would mean that there is still no CGT paid on death but the beneficiaries base cost for future disposals would be the deceased’s historic acquisition cost.
This would likely increase any tax due and would also add a layer of extra complication in establishing what was originally paid for the asset which may have been owned for many, many years.
CGT on lifetime gifts
The CGT free uplift on death was also deemed to act as a deterrent to lifetime gifting with the possibility of a double tax charge. This is because CGT could be payable at the time of the gift and potentially Inheritance Tax too if the donor failed to survive for seven years from the date of the gift.
The OTS report suggests that a lifetime gift of assets could also be moved to a no gain no loss basis to encourage the transfer of wealth between generations. Any gains would then be deferred until the asset is finally sold.
An increase to the rate of tax payable on capital gains combined with a cut to the annual exemption is not good news for savers. Profits on unit trusts and shares could be taxed at twice the current rate (although remember that under these proposals only the gain above inflation would be taxed).
Reducing the annual exempt amount would reduce the benefit of selling assets to bank gains up to the exemption each year. The current exemption can be worth up to £2,460 a year for a higher rate taxpayer. If it is cut to £4,000 combined with a move to income tax rates, the annual tax saving is reduced to £1,600.
Whilst these are only recommendations and, as stated earlier, may not be enacted, the huge increase in borrowing as a result of the pandemic means tax increases are inevitable. If you would like to look at your own situation in more details, please feel free to get in touch.