Whilst the UK government has provided a substantial amount of financial support for businesses and individuals during the ongoing Coronavirus pandemic, the question of how they intend to recoup some of this funding is never far away, with an increase in Capital Gains Tax (CGT) rates predicted by many as one of the planned avenues of attack.
Further weight has been added to these predictions following the recent submission made by the Office of Tax Simplification (OTS), dated 11th November 2020, in response to the Chancellor's request for them to review the CGT regime back in July this year.
Bill Dodwell, the Tax Director at the OTS, has stated “If the government considers the simplification priority is to reduce distortions to behaviour, it should consider either more closely aligning Capital Gains Tax rates with income tax rates, or addressing boundary issues as between Capital Gains Tax and income tax”. To put this suggestion into context the current top rate for CGT is 28%, whereas the top rate of income tax is 45%, so to align the two taxes could see a dramatic increase in the amount of CGT paid on gains.
In addition to the above proposals, the OTS has also suggested that the annual CGT exemption, which currently stands at £12,300 for the tax year ending 5th April 2021, be reduced to between £2,000-£5,000 to bring more individuals into the CGT regime. It is estimated that this could generate additional revenues of up to £900M and bring a further 400,000 individuals into the self-assessment regime, forcing them to file annual tax returns each year.
Possible plans to reintroduce a form of indexation, where assets are given an inflation-based increase on their original cost up to the date of disposal, have also been mooted, though this would be far from a new idea. It was originally introduced back in 1982 (back when shoulder pads were big, Rubik's cubes were frustrating and most of us had to physically get up to turn the tv over to one of only 4 channels we had available) and abolished, under the guise of Taper Relief, in 2008 for individuals.
Business owners could also be hit hard, with the OTS review is recommending a far stricter qualifying criteria for Business Asset Disposal Relief (formerly Entrepreneur's Relief) and extending the qualifying holding period from the current 2 years to 10 years, making the relief far more focused on retirement than it is now. The OTS Review has also recommended that the lesser known Investor's Relief, where a reduced rate of CGT is payable on certain share disposals, be scrapped, which would make it one of the shortest reliefs on record. Share options/share schemes have also been brought into the firing line.
Another proposal put forward by the OTS relates to the transfer of assets on death, where currently these are inherited at the Probate Value (the market value at the date of death) which generally means that any gains or losses are minimal if these assets are then disposed of shortly after being inherited. The OTS has suggested that this uplift be removed and the individual inheriting the asset be treated as acquiring the asset at the original acquisition price paid for by the deceased, which could significantly increase any gains on disposal, especially when property is involved.
Understandably, the above has made many people very nervous, particularly those currently sitting on substantial accrued gains. At Sopher + Co we have already had several clients contact us to discuss their situation, with one client preferring to err on the side of caution and crystalize gains of £1.5M on their share portfolio now to ensure that they pay CGT at only 20% on these gains rather than delay disposal and risk paying considerably more should the rate of CGT increase. Others are prepared to sit tight in the hope that no increases will happen until 2022, when the words 'lockdown' and 'pandemic' are, hopefully, a thing of the past.
Although we do not have a crystal ball and are unable to predict exactly when CGT rates will increase, the likelihood is that this will happen at some point, though history does show us that this is unlikely to happen before the Chancellor's Budget next year. This does, however, give us time to put plans in place for you.
Should you wish to discuss anything in more detail our experts at Sopher + Co are here to assist. Please complete our online contact form, email us at email@example.com or call 020 8207 0602.
-Mark Dawes, Senior Tax Manager