As one means of helping to repay the billions borrowed to support the economy through the Covid-19 pandemic it now seems quite likely that Chancellor of the Exchequer Rishi Sunak will turn his attention to CGT rates and allowances in his next Budget.
CGT is levied on gains made on disposals of chargeable assets including shares in company and properties including second homes and buy to lets. Current CGT rates are 10% / 18% / 20% / 28% depending on the nature of the asset being disposed of and the level of the individual’s income for the tax year of disposal. As a result of the annual exemption the first £12,300 of chargeable gains made this tax year are free from CGT. The disparity between the foregoing CGT rates and income tax rates (current top rate 45% where income exceeds £150,000) has become marked in recent years. CGT currently raises about £9bn per year for the Exchequer.
In July this year, the Chancellor asked the Office of Tax Simplification (OTS) to conduct a review of CGT.
The OTS published their first report on 11 November. A number of the recommendations make for quite drastic reading and are summarised below.
Closer alignment of CGT rates with income tax rates
The OTS recommends that the Government should consider closer alignment of rates, in other words, increase CGT rates. The OTS do comment that if CGT rates are to be increased, indexation relief should be reintroduced and there should be greater flexibility for the use of capital losses.
CGT on gains made on disposal of UK residential property is now payable within 30 days of completion and increasing the rates above the 18%/28% would be an easy win for the Chancellor in terms of increased CGT revenues and immediate cashflow benefit.
Annual CGT exemption
The OTS states that if the annual exemption (£12,300) is to operate as a true de minimis, it should be reduced to between £2,000 and £4,000.
Capital Gains market value uplift on death
The OTS recommend that where a relief or exemption from inheritance tax applies (e.g. Business Property Relief or Agricultural Property Relief), the Government should consider removing the market value uplift on death.
Such a move would be highly unpopular for SME business owners including those carrying on farming trades. It is difficult to see how such a measure would represent a simplification of the CGT legislation given a need to establish the deceased’s historic acquisition cost of assets.
Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) and Investor’s Relief
Both reliefs can afford a flat 10% CGT rate on qualifying gains, subject to respective lifetime limits of £1m and £10m. The OTS recommends modifying and potentially tightening up the conditions for Business Asset Disposal Relief, and completely abolishing Investor’s Relief.
The Chancellor’s Autumn Statement was cancelled and hence it is highly likely that he will hold a Budget in March 2021 at which any CGT revenue-raising measures for the tax year commencing 6 April will be announced.
For now, taxpayers should review their asset holdings and review whether it would be prudent to make or advance disposals of chargeable assets to the current tax year.
By Sheldon Cole, Partner