Are changes to Capital Gains Tax imminent?

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The Government's financial support of individuals and businesses through the COVID-19 crisis has increased borrowing and the national debt.  One way the Government is expected to raise funds to meet those costs is through increases in capital taxes.

Chancellor Rishi Sunak has instructed the Office of Tax Simplification (OTS) to conduct a full review of the current Capital Gains Tax (CGT) system.  This review will examine current rates, exemptions, reliefs and the administration process of payment and reporting to HMRC.

The Autumn Budget may be the point that reforms to the CGT regime are implemented.  Individuals and business owners who are likely to be affected by the changes should review their estate planning now.

Rates

At present CGT is charged on disposal of assets such as property or shares which have increased in value.  The rate of CGT for individuals is currently 10% for lower rate Income Tax payers and 20% for higher rate Income Tax payers, except for disposals of residential property on which rates of 18% and 28% respectively apply.

The current CGT rates are low compared to the rates of Income Tax (20%, 40% or 45%) and Inheritance Tax (40%), and are also historically low compared to previous rates of CGT.  It may be that the OTS suggests increasing CGT rates to bring them into line with Income Tax and Inheritance Tax.

Individuals and business owners considering whether or not to gift assets as part of an estate planning strategy should be mindful that CGT rates could increase in the near future.

Reliefs

There are numerous reliefs which can be applied to reduce the amount of CGT payable when a disposal is made.  The most commonly used relief applies to the disposal of a person's main residence, where CGT is not charged.  The large number of reliefs mean that relatively few people pay CGT, especially compared to the numbers who pay Income Tax, and it could be viewed politically as a wealth tax.

That may make it easier, politically to increase CGT rather than increase other taxes.

One relief that might be reviewed is that no CGT is charged on a person's assets after their death, even where no Inheritance Tax is payable.  Instead, gains are wiped and the base cost of the asset is set at the date of death value for a future disposal.  Assets passing free of both CGT and Inheritance Tax might be considered too generous.

Another useful relief, which is commonly used by individuals when gifting property into trust, is hold-over relief.  This relief defers payment of CGT until a future disposal by the trustees, when CGT could potentially be deferred again.  It may be that the OTS will look to accelerate the payment of CGT payments.

Conclusion

Once the consultation period has ended, it will be very interesting to see how the Government implement the OTS report.  It would be sensible to review estate planning before the Autumn Budget and consider what action can be taken in advance of potential changes.