9th September 2021
The Office of Tax Simplification put forward a number of proposals in November 2020, although changes to the tax system were limited in the 2021 Budget. The government have kept their options open however, with reviews of CGT (and other aspects of the tax system) firmly on the table as part of a future Finance Bill.
Capital Gains Tax (CGT) is one area that may be due for an overhaul in the near future, with the aim of increasing tax revenue.
A Brief Guide to Capital Gains Tax
CGT applies if you dispose of an asset that has increased in value since you acquired it. This is the case whether you sell the asset, give it away, or sell it to a relative or friend for less than it is worth.
CGT works as follows:
Part of the problem with CGT is that it is a transactional tax. You can avoid it by simply not selling assets. This means a careful balance needs to be struck between increasing revenue, and keeping the rates at a palatable level so that investors don’t aim to avoid it altogether.
Aligning CGT Rates with Income Tax
One of the proposals involves aligning the tax rates with the income tax system. For example:
The rate of CGT has historically been higher than it is now, and closer to the rates of income tax. The current rates were only introduced in 2016 (with the previous, higher rates being retained for property investments) to encourage investors to buy shares rather than property.
Prior to 2008, CGT rates were in line with income tax rates, so there is certainly a precedent for this.
At the moment, you can realise gains of up to £12,300 without paying tax or declaring the gain on your tax return.
One method of increasing tax revenues could be to reduce this exemption. A reduction of between £2,000 and £4,000 has been suggested.
This could increase tax revenues on a single disposal by up to £1,120.
There are a number of reliefs available when calculating your CGT liability. For example:
Taxation of Estates
When someone dies, their estate may be subject to Inheritance Tax (IHT). But any capital gains on their assets are effectively wiped out. The estate, and subsequently their beneficiaries, receive the assets with a new base cost, equivalent to the value at the date of death. Gains are only taxable if the assets rise in value after death, prior to being sold.
IHT only applies on estates over £325,000. Couples who are eligible for the Residence Nil Rate Band have an exemption of up to £1 million to set against their joint estate. This means that the majority of estates will avoid IHT altogether.
Removing the CGT uplift on death would not only increase the tax on larger estates. It would also be likely to catch more modest estates, as plenty of people have investments and property, but not all are millionaires.
What Can You Do?
The tax system changes all the time. This is something we have no control over. But there are always things you can do to make your own tax affairs more efficient. For example:
It’s unlikely that you will be able to avoid tax altogether. But a good financial plan will aim to minimise tax, evolve when legislation changes, and bring you closer to your goals.
Please don’t hesitate to contact a member of the team to find out more about tax planning.