Capital Gains Tax update: will the rules be changed?
Capital Gains Tax (CGT) is a tax on the increase in the capital value of an asset when it is sold or given away. Some assets, such as a person's main residence, are not subject to CGT. Typically, investors pay CGT on the disposal of second properties, and investments and business assets such as shares.
The Office of Tax Simplification (OTS) have just published their review of CGT which looks at how individuals change their behaviour based on the current CGT rules. The review located four areas in which the OTS considered that CGT was counter-intuitive, and created odd incentives and opportunities for tax avoidance.
It is better to review estate plans now before any new tax changes creep in. It has been reported that there is a worry that if the recommendations were brought into effect – especially the change to the capital gains tax uplift on death, some assets would become 'unsellable' due to the increased gain (and increased tax liability).
The proposed changes
1. Rates and Boundaries
At present, there are three rates of CGT applied to higher and additional rate taxpayers: 20% for the gain on most assets, 28% for the gain on residential property, and 10% for the gain on business assets that attract Disposal Relief or Investors Relief. All three rates are significantly lower than the equivalent rate of Income Tax, which is taxed at 40% for higher rate taxpayers and 45% for additional rate taxpayers.
The OTS has suggested that:
- CGT rates should be simplified and aligned with Income Tax rates; and
- a distinction should be made between the applicability of CGT and Income Tax to ensure that the right tax is paid. The report raised examples where structuring can take place to ensure that a lower rate of tax is paid.
2. The Annual Exempt Amount
The Annual Exempt Amount (the allowance) is the tax-free gain that can be made in any tax year. It is currently set at £12,300 for individuals.
The OTS have said that the allowance is too high. Frequently, net gains are reported close to, but not over, the allowance to ensure that no CGT is paid in any one tax year. The OTS has suggested that the allowance is reduced to between £2,000 and £4,000, meaning that more people would be brought within the scope of CGT.
3. Capital Transfers
When someone dies their assets are passed to their beneficiaries. CGT is not paid on death and beneficiaries acquire the assets at the date of death value. This is known as the CGT uplift on death. The original policy reason was to ensure that an asset is not taxed twice for CGT and Inheritance Tax.
The OTS argues this uplift can impede assets passing down generations as people hold assets until death. If the asset is not subject to Inheritance Tax the beneficiary can receive the asset with no tax paid. The OTS suggests that the CGT uplift on death is removed in its entirety so new owners of assets are treated as acquiring them at the original acquisition cost.
4. Business Reliefs
Disposal Relief (which replaced Entrepreneurs' Relief) and Investors’ Relief applies a 10% rate of CGT against the gain on certain business assets. These reliefs are considered ineffective in terms of achieving policy aims as they do not encourage the growth of businesses and investment in them (as an alternative to investing in a pension). According to the report, these reliefs should be revisited and targeted to achieve policy aims.
We regularly advise clients in relation to the management and inheritance of wealth, and on estate planning structures. If you would like to discuss your estate planning options with us then do get in touch.