TT335: Changes afoot for Capital Gains Tax
Over the last few months many of the national newspapers have run stories on anticipated changes to capital gains tax (“CGT”). The most common predictions have been the alignment of income tax and CGT rates and the abolition of Business Asset Disposal Relief (the relief formally known as Entrepreneurs Relief).
In July 2020 the Chancellor of the Exchequer asked the Office of Tax Simplification (“OTS”) to carry out a wide-ranging review of CGT. The OTS has now reported on the policies and principles of CGT and make a number of significant recommendations. Many of the recommendations are not new and many of them seem to involve reintroducing concepts in CGT that have been long since been abolished.
So, what are the principal recommendations from the OTS?
A significant reduction in the CGT Annual Exemption to £5,000 per annum.
The current annual exemption is £12,500 so a lowering of the exemption is likely to cause many more individuals to pay CGT on an annual basis. The OTS take the view that many individuals structure their affairs to make gains rather than income on investments to take advantage of the annual exemption!
Aligning CGT and Income Tax Rates
It is thought that the current rates of CGT, 10% and 20% for ordinary gains and 18% and 28% for gains on residential dwellings are complex and as they are below income tax rates distort taxpayer behaviour.
The OTS recommendation is that the rates of CGT are more closely aligned to income tax rates. However, without appreciating the apparent irony (given their primary goal is simplification) they have also recommended at the same time re-introducing a form of inflation relief and rebasing long held assets for tax purposes perhaps to Millennium values. It looks like the tax system may be turned back over 30 years.
In 1988 Nigel Lawson was the last Chancellor to align rates of income tax and CGT, but he increased the top rate of CGT from 30% to 40% whilst at the same time dropping the top rate of income tax from 60% to 40%. It is difficult to imagine a similar adjustment to income tax rates this time around!
Realignment of Business Asset Disposal Relief (“BADR”)
BADR until the March 2000 budget known as Entrepreneurs Relief has already been cut down to size being reduced to having a lifetime limit of £1M per individual. The OTS however now want the relief to be more aligned to retirement. For those readers that follow this sort of thing retirement relief for CGT was abolished in 1998.
1998 was when taper relief was introduced on the abolition of indexation relief. Taper relief was then abolished in 2008 and Entrepreneurs Relief created in its place. It is beginning to look as though we are about to go full circle.
Abolition of automatic CGT rebasing on Death
When an individual dies their estate has a potential liability to Inheritance Tax (“IHT”) subject to whatever reliefs and exemptions for IHT their estate may be entitled. As a corollary the assets in an estate are re-valued to market value for CGT purposes washing out past gains, the idea being that the same asset should not bear both of the two separate taxes.
The OTS propose that if an IHT exemption applies on death so that no IHT is paid on the asset there should be no CGT rebasing so when the asset is sold by the estate or a beneficiary CGT would arise.
The OTS also propose that the range of assets that might be gifted in life with the capital gains effectively being passed on to the new owner be extended. This is another attempt to roll back time as over the last 20 or so years the availability of so-called hold over reliefs have become increasingly restricted.
What happens next?
The Chancellor’s team will need to consider whether the OTS recommendations fit their wider policy objectives and decide the way forward. The OTS still have to report on the administrative side of CGT but that aspect is unlikely to prove as contentious.
The OTS suggest that now is not the time for change and that a delay to 2023 would be sensible. What the Chancellor thinks of the proposals we will have to wait and see.
We know our clients are already accelerating transactions in anticipation of increased CGT rates which could come at any time!
If you are concerned as to how the OTS recommended changes might impact you, please do not hesitate to reach out to your contact at Barnes Roffe.
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