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What the government review of CGT means for you

In July, chancellor Rishi Sunak wrote to the Office of Tax Simplification requesting a review of Capital Gains Tax. Here’s what it means for you.

the words tax written on a calculator

by
Graeme Dreghorn

in Features

12.11.2020

Rishi Sunak’s letter to the Office of Tax Simplification (OTS) set out the desire to simplify the Capital Gains Tax (CGT) system. The political and economic background to this request is the rising bill the UK faces to cover the cost of the Covid-19 pandemic, estimated at more than £190bn. Politicians will clearly be looking at CGT as part of any solution. 

From a fiscal perspective, CGT generates a reasonable return for the government, but it is proportionately less than other taxes. The last detailed figures on tax were from 2017/18, when 276,000 people paid £9.5bn in CGT, which means these receipts only made up 0.45% of our Gross Domestic Product, from a tax that less than 0.5% of the population of the UK pay. In the same period, Inheritance Tax generated £5.2bn in revenue with only 0.04% of the population contributing. 

For a government needing to raise funds, it is easy to see why this would be a tempting place to start, this is a tax relatively few people pay, and one that doesn’t deliver the same bang for the buck as its peers.

On what do you pay CGT? 

CGT should be a simple tax to understand. It is due on any profit you make when selling any asset that you own valued at more than £6,000. This is what is called a chargeable asset. CGT is not levied on your car or your main property. Furthermore, everyone has a personal allowance, which is currently £12,300. However, the regime is littered with complexities. There are also reliefs available, making this one of the more complex tax regimes. 

The rates at which CGT is levied is also variable. The main rate is 10% for basic-rate taxpayers, and 20% for higher and additional rate taxpayers. Gains on property are taxed at different rates of 18% and 28%, dependent on whether the gain is against basic or at the higher rate. When you compare this to the current Income Tax rates at 20/40/45% and Inheritance Tax at 40%, we can see that the current CGT regime is due at a lower rate than other taxes. 

How might it change?

So, we know that CGT is charged at differing rates to other taxes, has a range of varied exemptions – and doesn’t raise much in terms of revenue relative to other taxes. Historically, CGT has been charged at much higher levels, but is it a fair assumption that the CGT rates will be increased from current levels? 

Whilst nothing is certain, when a government needs to raise funds and you have a tax at a level lower than other comparative taxes – and at a historically low level – this seems a likely outcome. 

We may return to capital gains being taxed against income tax, or a new banding introduced for additional-rate taxpayers above the current threshold. We may even see a return to the flat rate of 30%. Any of these measures would provide much-needed revenue to The Exchequer. 

Another area that might be up for review is whether the Chancellor and OTS look at Principle Private Residence Relief. This tax relief cost the UK Treasury £27.6bn in 2017/18 – and it was the second most expensive relief behind the personal allowance for income tax. There has long been a discussion on a wealth tax and, with the current housing stock valued at £7.4 trillion, this could this be a relief that is amended. The issue this creates is that, as CGT is only due on the transaction, this might cause people to simply stay put and not sell a property to avoid this tax, clogging up the property market. 

What can you do?

Some financial planning and tax management strategies that can be helpful in this scenario. 

Make sure you keep a note of your losses. If you have suffered any losses with any assets, make sure HMRC are aware. Any capital losses that you have ever made can be carried forward and offset against any gains, but this isn’t an automatic process. 

Transfer assets between spouses if you can. Spousal transfers are free of CGT, so if you are married or in a civil partnership and have assets with a large profit, transferring or sharing ownership of an asset you are going to sell can be a good idea so that both allowances can be used. 

Donate to Charity. If you are planning to leave a legacy to a charity you could consider gifting the assets now. Transfers to a charity are free of CGT, so gifting the assets promptly not only gives charities a benefit at a time when the third sector is struggling because of the implications of the pandemic, it also reduces your tax burden. 

Understand where you have gains and plan accordingly. Make sure you have a clear picture of any assets that are liable to CGT and then be smart about how you use your money. If you have a rental property you are thinking about selling in the future, and money to invest now, consider investments that aren’t taxed against CGT, such as ISAs, Pensions and Bonds.

Use your allowances. Your ISA allowance is £20,000 per year, and if you have investments any assets in ISAs are exempt from CGT, so you should ensure these are fully funded each year. If it is possible for your investment holdings, try to use your capital gains allowance to the full each year. Trimming profits is something an Investment Manager should be doing automatically to use as much as your allowance as possible within a portfolio. Combining these by ensuring you regularly Bed and ISA from investment accounts to ISAs to use up both allowances is typically the best strategy with invested funds.

Time your disposals – if you need to sell, if you can try to spread sales across tax years, this will double up the exemption allowance used. When done across a couple, for jointly owned assets, this quadruples the allowance. 

Involve professionals. Take the advice of accountants, financial planners and investment managers. Allow and encourage them to speak to each other to find the best solution for you. Other more-complex solutions like Venture Capital Trusts (VCTs) or Enterprise Investment Schemes (EIS) may even be appropriate given your circumstances. 

This is a complicated area, and it would be best if both financial planning and tax advice is taken before making any changes to your portfolio. Every individual tax situation is unique and making these changes may not reduce the amount of CGT that you pay, but the good news is the strategies detailed above can have positive effects in other areas.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Tax reliefs are those currently applying, and the levels and bases of taxation can change. Tax treatment depends on the individual circumstances of each person or entity and may be subject to change in the future. 

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