One of the areas most likely to be targeted by the government in the coming months is the Capital Gains Tax (CGT) framework. With CGT bills hitting their highest levels last year, Peter Webb, our Head of Tax Advisory, examines what might be coming, and how you can plan accordingly.
As the government seeks to recoup the staggering costs of the pandemic, speculation is rife that CGT revenues will rise even further. In the last full tax year (ending 5 April 2020) almost £10 billion was paid in CGT; more than ever before.
CGT is usually paid when you make a gain on the disposal of an asset, for example when you sell shares or a buy to let property. This year you’re able to enjoy capital gains of up to £12,300 without paying tax; known as the annual allowance. In March 2021 Rishi Sunak, the UK Chancellor, announced the CGT allowance will be frozen until 2026. Taking account of inflation, this means that in fact we’ll be paying more CGT in the years ahead.
It’s also worth noting that CGT rates are currently at historic lows, sitting between 10% and 28%. Compare this to the 1980s when rates were aligned with Income Tax with an astonishing top rate of 40%.
The state of play
In July 2020 Rishi Sunak asked the Office of Tax Simplification (OTS) to review CGT. The OTS responded with two reports in November 2020 and March 2021 and recommended aligning CGT rates with Income Tax rates (the top rate of which is 45%), reducing the annual exemption and removing some complex (but helpful) reliefs. What was noticeable is that there were no recommendations to reduce the amount of CGT! Instead, the top rate of CGT for shares could more than double from 20% to 45%.
So far, no announcements about changes to the CGT framework have been made. However, although the date of the next Budget statement hasn’t been announced it’s expected to come in Autumn, and it’s likely we may see some changes revealed then.
CGT is paid by very few of us; just 265,000 taxpayers in 2019/20. There’s certainly a perception that only the very wealthy pay CGT, which increasing makes this tax less controversial for governments. However, if the annual exemption is reduced (or even abolished) many more could be drawn into the CGT net.
Steps you can take
So is there anything you can do to protect yourself from these, seemingly inevitable, changes? A few simple steps can help you ensure you’re in the best position:
- Ensure that you’re using all your exemptions when realising any gains; currently it’s possible for a couple to shelter up to £24,600 from CGT each year.
- Consider spreading the sale of shares (for example) over subsequent tax years to make use of two years’ worth of allowances.
- Ensure that you’ve calculated any gain correctly and capture all of the allowable costs that can be offset.
- Make the best use of capital losses; if you’re selling an asset at a gain, do you have another you can dispose of at a loss to reduce the tax? Timing is very important; the capital loss needs to be made in an earlier tax year or the same tax year as the capital gain, not in a subsequent one.
- Plan your investments; there are some which allow you to defer or reduce capital gains made.
- Consider your investment strategy – are you able to invest in assets that are free of CGT? Perhaps a stocks and shares ISA?
If you have any concerns about CGT and how potential changes could affect you, please contact your nearest office.