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Last updated: 27 Apr 2021
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How CGT reform could impact investments, gifts and businesses

With a severe deficit in the Treasury’s books, one that has not been seen since World War II, and the 2020 OTS report on Capital Gains Tax (CGT) reform, there’s speculation of CGT rates increasing to align closer to Income Tax. How could this CGT reform impact you?

For a number of years, there has been a disparity between Income Tax and CGT rates. This has created opportunities for taxpayers who favour investments that generate capital gains rather than income. 

It is important to note that the maximum CGT rate was not always 28%. Up until the 2007/08 tax year, CGT and Income Tax rates were the same, meaning that a higher rate taxpayer could pay as much as 40% on any gains realised in excess of their annual exemption, although there were reliefs, namely indexation allowance and taper relief that took into account inflation during the course of the period of ownership.

The report published by The Office of Tax Simplification (OTS) on CGT reform back in November 2020 sparked conversation and headlines, speculating that there would be possible CGT rate increases announced in the Spring Budget. However, the Chancellor did not implement any major increases to tax rates for individuals.

There was also no indication of the direction of travel in the consultations published on Tax Day on 23 March 2021. This does not mean that CGT increases will not be considered in the future, maybe the autumn, particularly as CGT does not form part of the “triple lock” of taxes that the Chancellor promised would not be increased.

So what could the Office of Tax Simplification’s (OTS) proposed CGT reform mean for your…

About the author

Rume Oshenye

+44 (0)20 7556 1398
oshenyer@buzzacott.co.uk

For a number of years, there has been a disparity between Income Tax and CGT rates. This has created opportunities for taxpayers who favour investments that generate capital gains rather than income. 

It is important to note that the maximum CGT rate was not always 28%. Up until the 2007/08 tax year, CGT and Income Tax rates were the same, meaning that a higher rate taxpayer could pay as much as 40% on any gains realised in excess of their annual exemption, although there were reliefs, namely indexation allowance and taper relief that took into account inflation during the course of the period of ownership.

The report published by The Office of Tax Simplification (OTS) on CGT reform back in November 2020 sparked conversation and headlines, speculating that there would be possible CGT rate increases announced in the Spring Budget. However, the Chancellor did not implement any major increases to tax rates for individuals.

There was also no indication of the direction of travel in the consultations published on Tax Day on 23 March 2021. This does not mean that CGT increases will not be considered in the future, maybe the autumn, particularly as CGT does not form part of the “triple lock” of taxes that the Chancellor promised would not be increased.

So what could the Office of Tax Simplification’s (OTS) proposed CGT reform mean for your…

Investments

Investments

In previous decades, the more attractive CGT rates encouraged individuals to invest in assets that were chargeable to CGT rather than Income Tax. 

This proposed alignment of tax rates is not unprecedented as mentioned above; as up until 5 April 2008, income and CGT rates were level, although mitigated slightly by indexation allowance and taper relief. 

For basic rate taxpayers, profits on asset sales would increase from 10% to the income tax level of 20%, and from 18% to 20% for property sales. For higher rate taxpayers, the tax increases from 20% on asset sales and 28% on property sales to 40%. This is even harder hitting for additional rate taxpayers, as the rates rise to 45%. 

Even though no tax rises were announced by the Chancellor in this year’s Budget, we may still expect to see CGT reforms in the future and this may fleshed out in the second report from the OTS on CGT.

Annual exemption

Annual exemption

The OTS proposed reducing the threshold at which tax kicks in from £12,300 to £5,000. Currently, many taxpayers do not pay CGT by realising and reporting gains just under the £12,300 threshold; however this proposal would likely bring far more taxpayers into the tax net and impact those who currently are not required to file a self-assessment tax return.

The Chancellor has since announced that this allowance would be frozen until 2026, so it would appear that the government have now ruled out this proposal at least for the medium term.

Gifts on death

Gifts on death

Currently, there are situations, where a spouse receives assets from the deceased’s estate free of Inheritance Tax and with no CGT on death, as they inherit assets with an added uplift to the market value at death. If the spouse was to subsequently sell the asset relatively quickly after receiving their inheritance, there would be minimal CGT to pay.

The OTS have recommended that a taxpayer should not receive both an Inheritance Tax exemption and a CGT death uplift. Therefore, with the possible removal of the uplift, the taxpayer will be treated as acquiring the assets at the historic base cost of the deceased spouse. This may present real problems for Executors as they try and piece together the historical base costs of the deceased. 

Again, there was no mention of any changes to the IHT allowances in the recent Spring Budget and one can still receive an uplift on death.

Business

Business

The report considered the two main reliefs which are in place to encourage investment, that being Investors’ Relief (IR) and Business Asset Disposal Relief (BADR).

These reliefs reduce CGT payable on the disposal of qualifying business assets, by the application of a lower 10% tax rate. 

The OTS concluded that the rate of tax is not really an incentive on its own and rather investment incentives should apply at the time the investment decision is made, which presents the argument for scrapping these business reliefs.

BADR, along with its predecessors, was recognised as a retirement relief and the proposals suggest that this relief should be geared towards those business owners who have built up their businesses over time and are of a certain age.

On the other hand, the OTS recognise that IR is a new relief and there is little evidence of people making use of the relief. However, it could be argued that this conclusion is premature as many who will take advantage in the first year this applies (2019/20), will only just have submitted their Tax Returns and we look forward to seeing the statistics on the uptake of this relief.

What should you do?

What should you do?

We await the second OTS report which will provide further detail as to the direction of travel of these proposals. However, for any investors or business owners thinking of making potential disposals, there could be significant changes on the horizon and we would recommend that you seek professional advice to ensure that you do not fall on the wrong side of potential changes. 

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Get in touch 

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