Following a request from Chancellor Rishi Sunak in July 2020 that it looks into the matter, the Office of Tax Simplification (OTS) has advised that the Capital Gains Tax system could be made simpler and fairer.
The OTS makes 11 recommendations in all; a second report that looks at the more technical and administrative issues is due to be released in early 2021. It is anticipated that the suggested changes would raise substantial amounts of tax for the Exchequer, which would clearly be very welcome by the Chancellor as he tries to balance his books in the light of the global pandemic.
We outline below some of the main recommendations and how they may affect individual tax payers, should the changes go ahead.
What is Capital Gains Tax (CGT)?
Capital Gains Tax is paid when you sell an asset at a profit. In the current (2020/21) tax year, you are allowed to make gains of up to a total of £12,300 before any Capital Gains Tax is due. Above that threshold, then basic rate taxpayers will pay CGT at a rate of 10% (or 18% on residential property). High or higher rate taxpayers will pay 20% (or 28% on residential property) CGT.
As you can see, CGT is particularly favourable for high or higher rate Income Tax payers, who currently pay 40% or 45% Income Tax and are charged 20%/28% CGT. However, it’s also advantageous to basic rate Income Tax payers, who pay 20% Income Tax compared with 10%/18%CGT.
What has the OTS recommended?
Recommendation 1: Have fewer and higher CGT rates
The OTS suggests that CGT rates become ‘more closely aligned’ with income tax rates and that they are simplified.
It is unlikely that any new flat rate of CGT will be lower than current Income Tax rates. Therefore, it looks as if basic rate Income Tax payers will be comparatively hardest hit by the changes.
Recommendation 2: Reduce the CGT tax-free allowance
As outlined above, you are currently allowed gains of up to £12,300 before any CGT is due. However, the OTS has suggested this amount is reduced to between £2-£4,000 in an effort to stop tax payers ‘using up’ their exempt amount each year. Alongside this recommendation, the OTS suggests exempting more personal items from CGT and various other changes to the way that CGT is reported.
Recommendation 3: CGT and inherited assets
Under current rules, if you were to inherit an asset and then go on to sell it for a profit, the amount of CGT you pay would be based on the price difference of the asset when you received it and when you sold it, rather than the price at which the deceased bought it. This is likely to significantly reduce the amount of CGT payable and is often known as ‘CGT uplift’.
The OTS is suggesting that those who inherit assets that are exempt from Inheritance Tax shouldn’t benefit from CGT uplift too. Instead, they should pay CGT based on the price paid by the deceased. Currently this is based on the asset’s estimated value in 1982. In addition, the OTS is suggesting the Government removes CGT uplift more widely and bases all asset values on 2000 prices. Both of these changes will significantly increase the amount of CGT payable by those who have inherited eligible assets.
The Government does not have to take up the OTS’ recommendations. However, bearing in mind the huge projected hole in the country’s finances due to COVID19 costs, it is certain that Chancellor Sunak will be looking for ways to generate additional tax revenues. That being said, he may find the OTS’ suggestions appealing.
Only time will tell which, if any, of the OTS’ recommendations the Government will implement. In the meantime, please don’t hesitate to contact your Financial Adviser for further help and advice on this topic.
The above information is based on our understanding of current UK legislation law, tax law and HM Revenue and Customs practice (December 2020), all of which may be subject to change.
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