The economic impact of the coronavirus pandemic is, as expected, enormous. The U.K.’s national debt is now over £2 trillion. An impossible number to imagine. And this takes us into debt that’s over 100% of our GDP. The difference between the country’s income from taxation and spending is predicted to be £400 billion by the end of this year. This level of budget deficit has never been seen before.
But we’ve never lived through a global health pandemic before. And the government are in the tough spot of trying to establish short-term financial safeguards and plan for our economic future. Chancellor Sunak commissioned a report by the Office of Tax Simplification as part of this future planning. He asked them to research the pros and cons of changing Capital Gains Tax policy, with a view to making more money for the Treasury’s depleted coffers.
Will changes to the Capital Gains Tax regulations affect me?
This is everyone’s first thought when any changes to tax legislation are proposed. Let’s look at the likelihood of your finances being affected by a raise in Capital Gains Tax.
In 2017-18, 31.2 million taxpayers paid £180 billion in income tax to HMRC. That’s 60% of the population.
In the same year, 0.5%, 265,000 people paid £8.3 billion in Capital Gains Tax.
Just looking at the raw figures, it’s unlikely that you’re going to be affected by any change to the Capital Gains Tax rules.
What are the current Capital Gains Tax rules in the U.K.?
Capital Gains Tax is a tax on the profit (gain) you make when you sell property or other assets. You don’t have to pay it at all on profits under £12,300 – this is known as the Capital Gains Tax allowance. Already you can see why this is a tax that only applies to 0.5% of the population. Not many of us own extra property, shares or other items worth more than this threshold.
There are four different rates of Capital Gains Tax:
- Basic rate income taxpayers: 10% on assets
- Basic rate income taxpayers: 18% on second homes
- Higher rate taxpayers: 20% on assets
- Higher rate taxpayers: 28% on second homes
This is the levy on the profit made when you sell your assets or property.
What changes are being proposed?
As a focus of their brief, the Chancellor asked the OTS 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 OTS opened their review up to input from a variety of sources, including academics, advisers and businesses, as well as the general public. Their conclusions are based on evidence from 1,000 participants in an online survey and 96 formal written replies. They also held a range of meetings with broad cross-section of “interested parties”.
The Office of Tax Simplification have suggested two changes to the Capital Gains Tax regulations:
- Lower the Capital Gains Tax allowance to somewhere between £2,000 and £4,000
- Double the existing Capital Gains Tax rates
They predict that this could bring in an extra £14 billion to the Treasury.
Their reasoning is interesting.
In terms of lowering the Capital Gains Tax allowance threshold, or Annual Exempt Amount (AEA), the report says: “The AEA clearly distorted investment decisions. Around 50,000 people report gains annually close to the threshold and so ‘use up’ the annual exempt amount as if it were an allowance – which is particularly easy for holders of listed share portfolios.”
By significantly lowering the amount of profit that can be earned before Capital Gains Tax is liable, people will be less likely to work around the rules and more tax can be collected.
Raising rates of any tax is rarely the popular choice. But OTS tax director, Bill Dodwell, said: “If the government considers the simplification priority is to reduce distortions to behaviour, it should consider either more closely aligning capital gains tax rates with income tax rates, or addressing boundary issues as between capital gains tax and income tax.”
HMRC said:”Some respondents argued that Capital Gains Tax is a barrier to economic growth, others that it is a barrier to a more equitable society.” This last point is interesting. Some participant in the research think that, as such a small, wealthy percentage of the population are ever in a position to be liable for Capital Gains Tax, it increases the wealth gap if they’re given the ability to dodge fair taxation. So aligning CGT with income tax is seen as a fairer option.
What’s likely to happen?
We don’t know if Chancellor Sunak will take these suggestions on board. The research was an information gathering exercise and does not bind the government to its conclusions.
A Treasury spokesperson said: “The government’s priority right now is supporting jobs and the economy. We thank the OTS for their independent report which will be considered in due course.”
Wait and see, is the only concrete conclusion we can come to here. In the meantime, you can work out if any of the proposals are likely to directly affect your financial position.
