Capital Gains Tax - Is a rate increase on the horizon?

13 November 2020

Before the scheduled Autumn budget, advisors and taxpayers alike were bracing themselves for a hike in the rate of Capital Gains Tax (“CGT”) as well as the very real possibility that some reliefs might be withdrawn altogether, for example Business Asset Disposal Relief (formerly Entrepreneurs’ Relief).

When the budget was pushed back to Spring there was an audible sigh of relief but it seems The Office for Tax Simplification (“OTS”) is keen to get this back on the agenda, with the publication of their report on how best to simplify the CGT regime, which includes aligning CGT rates with the much higher rates of Income Tax.

How COVID-19 could impact the tax rate

CGT rates are particularly low at the moment, ranging from 10% for basic rate taxpayers up to 28% for higher rate taxpayers on the sale of residential property. There are also some fairly generous reliefs available, including Business Asset Disposal Relief, which can reduce the rate of tax from 20% to 10% on up to £1million of gains. These low rates were set to encourage entrepreneurship as well as reward risk taking. However, the outbreak of COVID-19 has changed that focus somewhat and now the Treasury needs to identify ways to increase the tax take to fund the economic support provided during the pandemic. With £8bn of CGT paid in the 2017/18 tax year, it is estimated that this number could be doubled by withdrawing some reliefs and increasing the rates of CGT.

The OTS report is wide ranging and includes a number of recommendations. As well as an increase to the rates, the OTS has also proposed the following:

  • Withdrawing Business Asset Disposal Relief and replacing it with a relief focussed on retirement
  • Abolishing Investors’ Relief
  • Removing the uplift in value of assets on death with the recipient instead acquiring the asset at the original base cost of the deceased
  • Reducing the annual exempt amount (currently £12,300)
  • Taxing retained earnings in companies at dividend rates rather than CGT on the sale of the shares or when the company is liquidated
  • Reviewing employee share awards and the interaction of Income Taxes and CGT

The OTS acknowledges that alongside any of these changes there will need to be more flexibility in order for taxpayers to manage their tax affairs. For example, they recommend relief for inflationary gains, more flexibility in the use of capital losses, an extension to holdover relief and potentially rebasing the value of assets to a more recent date than the current 1982 values.

More uncertainty is certainly not what the economy needs at the moment and we hope any sweeping changes will be consulted on in advance of any budget day announcement to allow taxpayers the opportunity to plan if required. However, a number of recent budgets have certainly included an element of surprise and therefore it is important to consider your options and take any action to utilise reliefs and rates as they are now if that is beneficial.

If you would like to discuss this further, please contact Jill Walker, Private Client Tax Director, or your usual AAB contact.

To find out more about our Private Client Tax offering, click here

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