On 11 November 2020 the Office of Tax Simplification (OTS) published proposals for reforming Capital Gains Tax. The OTS is an independent adviser to the government, and whilst their proposals aren’t binding, they do give an insight into how UK tax policy is likely to change.
It’s clear any changes are still taking shape, which isn’t surprising given the current economic situation. The expected Autumn Budget Statement was replaced by a much simpler ‘Winter Recovery Plan’. And a formal statement on UK tax changes has been delayed until, perhaps, spring 2021. Given all this, it may still be a few months before we know the exact detail of any tax changes.
So, looking ahead, what are some of the likely changes? The following proposals for reforming Capital Gains Tax that have been made by the OTS offer some clues:
- The government should consider more closely aligning Capital Gains Tax (CGT) rates with Income Tax rates. Currently CGT is charged at 10% and 20% for most assets and 18% and 28% for residential property. Income Tax is charged at 20%, 40% and 45%. Aligning rates would represent a significant increase in CGT.
- In order to simplify CGT the government should consider reducing the number of rates. This would certainly make things more straightforward, but the concern is that fewer rates could result in CGT being charged at higher Income Tax rates. Alternatively, the lower rates of CGT, at 10% and 18%, may just be removed.
- Currently there is a CGT annual allowance that spares the first £12,300 of gains each year from tax. This exemption ultimately prevents many taxpayers needing to report small gains to the UK tax authorities. The OTS are suggesting that this annual exemption should be removed or reduced. They also suggest that investment managers should be required to report capital gains directly to HM Revenue. This would be a highly unwelcome move; the annual exemption could save you £3,444 in tax every year.
- The cost used to calculate CGT on an inherited asset is generally its value when the donor passed away. The OTS propose that the government should consider removing the capital gains uplift on death, instead using the historic base cost of the asset, a change that is likely to significantly increase the tax payable. This is another unwelcome recommendation.
- The OTS are also suggesting that CGT reliefs when selling (or disposing) of a business or business assets should be reformed. The suggestion is that reliefs should be more focused on retirement. Earlier this year we saw the valuable Business Asset Disposal Relief, which reduces CGT on the disposal of business assets, reduced by a staggering 90%. It would come as no surprise if further reductions and reforms in this area are announced.
The takeaway from all of this is that changes to CGT are highly likely in the coming months.
As a result, please do contact your adviser at The Fry Group to review your own finances. There may be actions that can be taken now to protect yourself from possible future Capital Gains Tax changes.
Peter Webb, Head of Tax Advisory