Since March 2020, the UK government has provided significant financial support to families and businesses to help support them through the COVID-19 pandemic. Although the country is not out of the woods yet, the economy is starting to reopen and the big question on everyone’s mind is ‘How will we pay for this?’
Last month, Chancellor Rishi Sunak requested that the Office of Tax Simplification (“OTS”) carry out a review of Capital Gains Tax (“CGT”) and aspects of the taxation of chargeable gains in relation to individuals and smaller businesses. This review may result in existing tax perks being reformed as part of an anticipated tax increase to cover the economic impact of COVID-19 in the UK.
CGT is payable by UK resident individuals on gains which arise in a tax year that exceed the tax free annual exempt amount (“AEA”) of £12,300. The rate at which CGT is charged is dependent on the taxpayers’ overall level of income and the type of asset disposed. All gains, excluding the disposal of residential property gains, are charged at rates of 10% / 20% for basic and higher rate taxpayers, respectively.
CGT is payable by UK and non-UK resident individuals on gains arising from the disposal of residential property at 18% / 28% for basic and higher rate taxpayers, respectively.
Numerous reliefs and exemptions are available which reduce or mitigate the level of CGT payable. This latest review poses the question of whether we will see a shake-up of these perks that may result in higher levels of CGT being collected on the disposal of chargeable assets in future.
A change to Entrepreneurs Relief (“ER”) was announced as part of the March 2020 Budget which reduces the lifetime limit of gains on which ER can be claimed from £10m to £1m, the result being that the 10% rate of CGT is only worth £100,000 to an individual instead of £1m over a lifetime of gains. It will be interesting to see if in light of this latest review whether ER will be restricted further to increase the amount of tax being collected at 20% on business assets.
A report published by The Social Market Foundation (“SMF”) has suggested the abolishment of another CGT relief, Private Residence Relief (“PRR”). Currently CGT is not payable on any gain arising when you sell your main home, or a second property which was once your primary residence for periods when it was occupied as your main and only home. This exemption can vastly reduce the amount of chargeable gain subject to CGT which can sometimes mean the difference between a gain being chargeable to 28% CGT or falling within the AEA.
The SMF report is suggesting that PRR should be replaced by a new “Property Capital Gains Tax” which could be set at 10% of the increase in the value of the property since it was last sold. The report suggests that around £421 billion could be raised over the next 25 years if this new tax were to be introduced to help aid the economic impact of the COVID-19 crisis.
With no clear answers at present there is still a significant amount of hearsay on the changes which could come in to play however it should be anticipated that a Capital Gains Tax system which looks different to the current is on the horizon as the UK navigates its way out of the Pandemic.
For any further information please contact Carol Edwards, Private Client Tax Manager, or your usual AAB contact.
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