On 13th July, Chancellor Rishi Sunak wrote to the Office for Tax Simplification (OTS) asking them to review the current Capital Gains Tax regulations.
What could the consequences be?
What is Mr Sunak actually asking for?
The letter is public and asks the Office of Tax Simplification “to identify and offer advice about opportunities to simplify the taxation of chargeable gains, to ensure the system is fit for purpose and makes the experience of those who interact with it as smooth as possible, as set out in the agreed terms of reference. This review should 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.”
This is with reference to both individuals and businesses.
Mr Sunak gives focus on “the regime of allowances, exemptions, reliefs and the treatment of losses within CGT, and the interactions of how gains are taxed compared to other types of income.”
And it’s these details that are fuelling panicked assumptions that the Chancellor is looking to make up some of his £30bn emergency spending deficit by increasing Capital Gains Tax rates.
The only comment from the Treasury is that “It is standard practice to keep taxes under review.”
The OTS has a deadline of 12th October to get their report to HMRC.
When do I pay Capital Gains Tax?
Capital Gains Tax is a tax on the money you make when you “dispose of” – sell – an asset. An asset can be stocks, shares, property (not your main home) and other items (like artwork).
There is a CGT tax free allowance of £12,300 for the 2020-21 tax year. So you can make this amount before you have to pay any CGT at all.
The amount of CGT to have to pay on your “gain” is dependent on your tax bracket. At the moment:
- Basic rate taxpayers pay 10% CGT on all assets except property, which is 18%.
- Higher rate taxpayers pay 28% on property and 20% on all other gains.
You don’t pay CGT on the sale of your private home.
Does CGT bring in a lot of income to the Treasury?
Predicted figures from the Office of Budget Responsibility say that CGT will bring in 1.1% of the entire tax revenue for 2019-20 tax year. This amounts to approximately £9.1billion.
What are the Chancellor’s options for raising more money through Capital Gains Tax?
As you can see, only a comparatively small proportion of the population are actually in the position to pay CGT. You are twice as likely to be in the Higher Rate tax band, if you pay CGT.
It is the wealthier section of taxpayers that will feel the effects of any changes to CGT rules most immediately. But it is important not to just dismiss this as ‘doesn’t apply to me’. We’re all interconnected in our economy and there are always ripple effects.
The OTS will prepare a researched list of possible options for the Chancellor to consider. There are already some reported contenders:
- Raising the rates of CGT – possibly to the same rates as income tax (20%, 40% and 45% bands)
- Decrease, or take away, the CGT tax free amount
- Make CGT applicable to a broader range of assets
- Change the peripheral, related reliefs. For example the Business Asset Disposal Relief which allows business shareholders and owners to pay 10% on £1m of their lifetime gains.
We’re all aware that it is going to be hard to balance the economy in the wake of the necessary COVID-19 spending. But what might appear to be a quick win, with an extra tax, doesn’t happen in isolation.
For example, putting up the CGT rate that must be paid on property will make the Treasury some money, but it may also slow the housing market. Property owners will be discouraged from selling their properties if they are going to face a higher tax bill.
Obviously, the government cannot make people sell their property, which is where tax incentives come into play to get more properties on the market and boost recovery. An increase in CGT on buy-to-let properties would be the opposite of an incentive and only see owners wait as long as possible before selling. The knock-on effect being that there are less properties on the market for anyone to buy.
And this is just one possible outcome for one of the potential CGT changes. The Chancellor will certainly have a lot to consider when he receives the OTS report in October.
Have your say?
As part of their research, the OTS has an online survey and an open call to taxpayers to share their thoughts about Capital Gains Tax.
“The OTS wants to hear directly from individuals and businesses as well as professional advisers and representative bodies about which aspects of capital gains tax are particularly complex and hard to get right, and to hear any suggestions for improvements.”
It collects opinions about the principles and practicalities of CGT and suggestions for improvement to both.
This is your chance to influence policy change, so get involved if its a subject you feel strongly about.