In July, Chancellor Rishi Sunak asked the Office of Tax Simplification (OTS) to conduct a review of capital gains tax and whether its current form is achieving its intended aims. The report was released in November, and here, Andrew Diver, head of tax at Beatons, explains the impact any changes could have and who might be hit the hardest.
The OTS is an independent advisory body to the UK government, and its reports have shaped changes to tax legislation since its inception in 2010. Rather than offering mere speculation, the OTS’ suggestions have very realistic prospects of becoming new tax laws. This particular report makes 11 recommendations for amending capital gains tax.
- Increase capital gains tax rates to align them with income tax rates. For a basic rate taxpayer, capital gains are taxed at 10%, disposal of residential properties at 18% and income tax at 20%. There is a concern that an increase in rates will become a disincentive to selling property, causing a lock-in effect and reducing economic activity.
- Reintroduce an adjustment to prevent the taxing of inflationary gains to only tax real gains. For example, in 2000 a Mars bar cost 29p. In 2020, the cost of a Mars bar has increased to 60p. Mars bars have not become a more sought-after item; the cost of items has generally increased due to inflation.
- If HMRC were to not align capital gains tax rates with income tax rates, they should reduce the number of CGT rates. This would mean keeping the rates the same for both selling assets and selling residential property. This would almost certainly mean the rate of tax on asset disposal would increase to at least 18% for a basic rate taxpayer.
- The biggest change for owner-managed companies would be from this recommendation; to tax accumulated profits as income on disposal. This would be intended to remove the disparity in tax rates between a 10% rate on selling or winding up a business and higher dividend rates (up to 38.1%) for extracting funds annually.
- The annual exemption should be reduced if this is simply a de-minimis because it is currently too high for that rule at £11,300. Calculations from the OTS suggest that the de-minimis should be between £2,000 and £4,000, and not dissimilar to the dividend allowance.
- Consider real-time reporting of capital gains linked to individuals’ personal tax accounts. The country already uses this system for residential property disposals which have a 30-day reporting time-limit.
- There was also a suggestion to change interaction with inheritance tax. When an individual dies, there is an automatic increase to capital gains tax to prevent double taxation. However, there are inheritance tax exemptions, such as spousal transfers, during which no inheritance tax or capital gains tax are paid, equating to a ‘double relief’. The OTS recommends that the automatic increase to capital gains tax should not apply where inheritance tax exemptions apply.
- The next recommendation follows on from the suggestion prior in that it advises there should be no capital gains tax uplift for all disposals on death. Any assets that are transferred will be taken on by beneficiaries at the original purchase price of the asset. However, this requires a significant amount of record-keeping which must also be accessible to the beneficiary. Significant gaps in information could make this ineffective.
- This recommendation seeks to remedy that proposal. It suggests that the system rebases all assets for transfers on death with a suggestion for their 2000 value. This would remove the need to find values for purchases prior to the year 2000, seeking to simplify the transition. In most instances, the value of the asset in 2000 is likely to be higher than any historical value prior to that. However, it is likely that an override to this rebasing would be permitted if pre-2000 costs exceed an assets 2000 value.
- The OTS is also suggesting replacing Business Asset Disposal Relief (also known as Entrepreneurs’ Relief) with a form of relief connected with retirement.
- Abolish investors relief. Almost all sources providing feedback to the OTS suggested that investors relief was not being used enough or targeted well. This form of relief provides a 10% rate of tax on disposals of unlisted quoting companies where the shareholder has no link with the company, as opposed to the normal 18% rate.
We can help
At the moment, these are simply proposals. However, there is a real possibility, especially with the cost of the Covid-19 pandemic increasing the need for tax revenues, that these will be enacted. Planning ahead could mitigate some of the effects these tax changes could cause.
If you or your business needs advice or assistance with any of these potential measures, get in touch with Beatons Group by calling 01473 659777 or email firstname.lastname@example.org to see how we can help.