What changes to Capital Gains Tax could mean for you

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With the British economy facing a huge black hole as a result of the coronavirus crisis, there are likely to be some tough tax and spending decisions in the next few years.

The Chancellor has recently fired the starting gun on possible tax rises with an announcement that he has ordered a review of Capital Gains Tax (CGT). So, what could change? And what would that mean for you?

Chancellor launches review of Capital Gains Tax

Earlier this month, the Chancellor took the first steps to a potential reform of CGT by commissioning a review of the tax. Rishi Sunak has asked the Office of Tax Simplification (OTS) to consider:

  • The overall scope of the tax
  • The tax rates which apply
  • Reliefs, exemptions and allowances that apply.

At present, CGT is not a major earner for the exchequer, raising just £8.8 billion in 2017/18. However, research from Hargreaves Lansdown has revealed that chargeable gains (before the Annual Allowance) came to £57.9 billion in 2017/2018, but only £8.8 billion of tax was paid. This implies an average tax take of just 15%.

The Chancellor has confirmed that every aspect of the tax will fall under the scope of the review, including the ISA exemption and principal private residence relief, which means homeowners don’t pay CGT on the sale of their main home.

Sunak is also keen to ascertain the relationship between CGT and other parts of the tax system, in particular how gains are taxed compared to other types of income.

He wrote: “I would like this review to identify and offer advice about opportunities to simplify the taxation of chargeable gains, to ensure the system is fit for purpose and makes the experience of those who interact with it as smooth as possible.

“In particular, I would be interested in any proposals from the OTS on the regime of allowances, exemptions, reliefs and the treatment of losses within CGT, and the interactions of how gains are taxed compared to other types of income.”

What has already changed?

The Chancellor has already made changes to CGT. In his first Budget, Sunak made sweeping changes to Entrepreneurs’ Relief, which offers a reduced 10% rate of Capital Gains Tax on qualifying disposals.

From March 2020, the lifetime limit on gains that are eligible for Entrepreneurs’ Relief was reduced from £10 million to £1 million. The Chancellor said that 80% of small business owners will be unaffected, but larger businesses or those realising significant gains on disposals will pay more tax.

What might change in the future?

With an estimated £300 billion hole in the public purse, the Chancellor is likely to have to make unpopular changes to taxation in the coming months and years.

The timing of the announcement of this review of CGT has been made so that such a review will be completed before he delivers his Autumn Budget. Any changes recommended could therefore come into force later this year.

Possible reforms that the Chancellor could make include:

  • An increase in the rate of tax payable. Rates could return to their old level (a top rate of 28% for all assets rather than just for residential property)
  • An alignment of CGT and Income Tax rates, so 20%, 40% and 45% tax would be paid on gains. It’s worth noting here that people who pay CGT are twice as likely to be higher rate taxpayers than those that do not.
  • Taxing capital gains at the same rate as dividend income. Currently, any annual dividend income from shareholdings above £2,000 is taxed at 7.5% (basic rate taxpayer), 32.5% (high rate taxpayer) or 38.1% (additional rate taxpayer).
  • A change to the exemption for primary homes. The fact that homeowners do not pay CGT on the sale of their main home costs the Treasury £26.7 billion a year. So, as Stamp Duty has been cut for properties under £500,000, could CGT be introduced for people selling a property for more than £500,000?

3 steps you could take now before any changes come into force

1. Maximise your holdings in tax-friendly savings vehicles such as ISAs and pensions (gains made within these are free from CGT, while withdrawals from ISAs are tax-free).

2. Consider ‘bed and ISA’ – sell shares or investment funds held outside an ISA and then rebuy them within the plan. The holdings will then be immune from CGT.

3. Consider crystallising gains between now and the Budget in November. Every individual has a tax-free CGT allowance (£12,300 in the 2020/21 tax year) and so you can make a gain of up to this amount without paying any tax. The proceeds could then be used to fund an ISA or pension.

Get in touch for help

With the CGT review set to end before the next Budget, you could have just a few months to make the most of the current rules before the Chancellor makes changes.

It could therefore be worthwhile taking steps to maximise your use of allowances and exemptions before any potential reforms come into effect.

For help with your tax planning, email enquiries@blackswanfp.co.uk or contact your adviser on 020 3828 8100.

Please note

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation which is subject to change.

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