Capital Gains Tax advice – is a hike planned for 2021? Understanding the implications and actions required
The Government is considering tax increases to raise revenue following increased spending in 2020 due to Covid-19. Of the areas where it is looking to make increases, it has been widely reported that Capital Gains Tax is very much in the Chancellor’s sight. with this in mind, taking expert Capital Gains Tax advice is now more important than ever.
Capital Gains Tax is levied on the profits or gains that an individual or business makes when it sells, gives away or disposes of an asset, such as property, business assets, art or shares.
The Office of Tax Simplification (OTS) has currently concluded its first report on Capital Gains Tax. The review was undertaken following a request by the Chancellor to ‘identify opportunities relating to administrative and technical issues as well as areas where the present rules can distort behaviour or do not meet their policy intent’
The first of two reports due on the subject (the second due in Spring 2021) made recommendations in four areas: rates and boundaries, the Annual Exempt Amount, capital transfers and business reliefs. Whilst the Chancellor didn’t announce any changes in the Budget 2021 on 3 March, it remains to be seen what changes may be made following the publication of this second report.
The Office for Tax Simplification (OTS) concluded in the published first report that Capital Gains Tax as it currently applies “can distort behaviour” as individuals seek to lower their liabilities. It believes that this tax could be as much as doubled to be brought in line with income tax. It also suggests that exemptions be cut, which would also raise liabilities, and thus revenues.
The main recommendations of the ONS report on Capital Gains Tax are:
- Aligning Capital Gains Tax with Income Tax (this would be a significant increase in many cases)
- Significantly reducing the annual level of Capital Gains Tax exemption (this is currently £12,300 and could be reduced a figure as low as £2,000 – £4,000)
- Abolishing Investors’ Relief
- Abolishing Business Assets Disposal Relief (formally Entrepreneurs’ Relief)
- The removal of Inheritance Tax uplift
- Reducing the scope where employees benefit from Capital Gains through shares received from their company
What is this likely to mean for you?
Should these recommendations be implemented (and it seems highly likely that at least some of these changes will be introduced, potentially as early as the next budget, possibly in March 2021) these will have far-reaching impacts for most taxpayers.
For example, reducing the annual exemption amount to £5,000 would double the amount of taxpayer eligible to pay Capital Gains Tax (reducing it to circa £1,000 would almost triple the number eligible).
Implications for business owners/investors
Where applicable, the sale of a business could trigger a much higher Capital Gains Tax liability, as could the sale of shares in a business.
Similarly, share option schemes could also be impacted, with many businesses wise to bring any plans forward into the current year.
Other Issues to consider are Business Asset Disposal Relief (formally known as Entrepreneurs’ Relief) and Investors Relief.
The OTS does not consider that the rate of tax on the eventual disposal of an investment is an effective means to incentivise the investment in the first place and that incentives for investment if required, should apply at the time the investment decision is made.
Accordingly, the OTS considers that Business Asset Disposal Relief is mistargeted if its objective is to stimulate investment and risk-taking by business owners
The OTS recommends that the Government should consider replacing Business Asset Disposal Relief with a relief more focused on retirement. These result of this will impact the tax paid on the sale of eligible businesses, potentially doubling the Capital Gains Tax paid from 10% to 20%
Investors Relief may be abolished if the Government follows the recommendation from the OTS. This relief applies to gains made on the disposal of investments in ordinary shares, effectively cutting the Capital Gains Tax by 50% to 10%.
How much could Capital Gains Tax increase by?
The Office of Tax Simplification has recommended that The Capital Gains Tax Rate should be more closely aligned with Income Tax. Currently, the highest rate of income tax is 45%. Whilst we are unlikely to see an increase as drastic as this, this does give considerable scope for a significant increase.
Implications for property owners/investors
Based on the recommendations of the OTS report, if Capital Gains Tax becomes aligned to income tax, this will push it up the liability up to either 18% to 20% or more significantly (and likely for the majority of investors/second homeowners) from 28% to 40% for higher ratepayers.
Furthermore, any decrease in the Individual annual allowance, especially to a figure as low as £2,000 would make many more individuals liable for Capital Gains Tax.
Any investors or homeowners with a second home looking to sell in the short to medium term may consider doing so sooner rather than later.
Read more about Capital Gains Tax on Property.
Capital Gains Tax advice – what actions to take now?
Whilst at this time we do not know what changes the Chancellor will be making, in many circumstances it could be prudent to bring any potential capital gains likely to arise in the short to medium term forward into the current tax year, utilising the current 10 and 20% CGT rates (18 and 28% for property).
Whilst it may not be possible to accelerate the sale of a business to meet these deadlines, other methods can be utilised, which may include the reorganisation of shares or gifts.
If a company is considering a share option scheme, it would seem sensible to do so in the current tax year.
Property Investors or individuals with a second home they are considering selling may also look to do this in the current tax year (they will also benefit from the temporary stamp duty reduction).
Contact a Capital Gains Tax Advisor for further advice
At Alexander & Co, our specialist tax team has expert knowledge and experience in assisting many diverse businesses. We work tirelessly to understand how clients’ businesses work and how best to assist their specific needs.
We can review your personal circumstances and advise on how to best deal with any Capital Gains Tax liabilities arising and recommend the best course of action going forward in the most tax efficient manner.