In a third article on estate and tax planning, Hilesh Chavda, Private Client Partner at Spencer-West LLP, explores the issues around the possible imminent review of Capital Gains Tax rates with Lucinda Blythe at The Pedestal.
Capital gains tax: the only way is up?
If the talk in financial columns is anything to go by, yes, up is the only direction for capital gains tax (“CGT”) rates in the near future. There has been lots of speculation that CGT rates would increase recently given it is at historic low levels and the Treasury coffers need filling. It has reached fever pitch (if talk of tax can ever do that) in the past month following publication of the report by the Office of Tax Simplification (“OTS”).
The government asked for CGT to be reviewed by the OTS, its independent adviser on the operation of the tax system. In response, it published a report with a number of recommendations including reviewing the tax rates and removing some reliefs.
Rates
The report suggested increasing the CGT rates to bring them in line with income tax.
Currently, CGT rates are 10% and 20% for basic and higher rate taxpayers respectively. For residential property the rates are 18% and 28%. In contrast, income tax rates are higher at 20%, 40% and 45% depending on the amount earned.
Bringing CGT in line with income tax means a doubling of rates.
Other changes
The OTS put forward other recommendations which would also increase the tax charge on gains made.
The annual CGT allowance of £12,300 allows gains up to this amount to be realised free of CGT. However, the OTS recommends reducing this annual exempt amount to £2,000 – £4,000.
Another recommendation, which is not as headline grabbing as increasing rates but would have a significant impact on many, is the removal of the capital gains tax uplift on death. Gifts in lifetime to the next generation or sale of assets would trigger a CGT liability. Often, people with assets that are sitting with large gains, such as heirlooms or properties, retain them until death to use the tax-free uplift of base values on death. This means the beneficiaries inherit the assets at the value at the date of death which in effect wipes out the unrealised gain. A bolder recommendation by the OTS is that assets should retain their historic base cost when they are inherited. Although there is no CGT due on inheriting the asset, it is storing up problems as the assets are still sitting there with huge (and increasing) gains. This would result in a very large CGT charge on any future disposal.
The line between fact and recommendation
Before everyone starts stockpiling money in their accounts to pay for increased taxes, it is important to remember that these are only recommendations from the government’s advisor.
The government is not bound by the OTS’s report. It is not obliged to listen to them or take into consideration what they have said.
Making these changes may look like they raise money for the exchequer, but it may change behaviour in ways which the government does not want. For example, increasing the rates may encourage people to hold on to assets rather than dispose of them and therefore decrease the overall tax receipts. The government could take the view that it is not worth the political storm for little or no increase in tax receipts, particularly as it is reported there is strong opposition within the Conservative party.
It is difficult to make predictions given that any changes will in some part be politically motivated, things are changing day by day and, I suspect, not even Mr Sunak knows what his thoughts are on this.
Having said that, it is always fun to speculate. It seems feasible that CGT rates could rise. Perhaps not quite doubling to income tax rates, however, a modest rate may be politically acceptable and increase the Treasury’s revenues. Whether there are more wide-ranging changes such as the reduction in the annual exempt amount and abolition of the tax-free uplift on death is much more debateable. These may be seen as too politically costly and have too many unintended consequences. There should be a budget in the spring of 2021 so it will be interesting to see what the Chancellor has to say about CGT.
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Hilesh Chavda, Private Client Partner, Spencer-West LLP | + 44 (0)20 7925 8080 | hilesh.chavda@spencer-west.com