Insights

It has been widely reported that the chancellor has asked The Office of Tax Simplification (OTS) to investigate whether capital gains tax (CGT) is ‘fit for purpose’. This investigation is being undertaken currently, with a report of findings expected in October 2020. Based on these findings, we can expect some changes to the current CGT regime.

It is fair to assume that we shouldn’t be expecting favourable changes- the UK government has borrowed and spent billions of pounds to try and fight the impact of Covid-19 and this is seen as a first step in finding ways to recoup this money. CGT is a form of wealth tax; as with inheritance tax it tends to affect more affluent, higher net worth individuals, so is an easy target in that there is unlikely to be nationwide condemnation of any increases; probably the opposite.

Currently CGT is quite complex; every taxpayer has an annual CGT allowance of £12,300 and there are 5 rates of CGT, depending on the type of asset involved and the individual’s income tax bracket. Rates range through 0%, 10%, 18%, 20% and 28%. In addition, there are several reliefs that have been altered in recent years, such as the principal private residence (PPR) exemption and entrepreneurs’ relief, now reduced and re-named business asset disposal relief.

To give examples of the different rates that can apply - gains arising on residential property sold by higher rate taxpayers are subject to a CGT rate of 28%, whereas the rate drops to 18% if the gain falls within an individual’s basic rate tax band. Gains arising on the disposal of other assets, such as commercial property and shares, attract rates of 20% for higher rate taxpayers, or 10% for basic rate taxpayers. By way of contrast, ‘wasting assets’ such as private wine collections or cars are not currently included in the CGT regime, nor are lottery wins, all of which are free from CGT.

Examples of some changes that could be recommended by the OTS include:

• A reduction in the PPR exemption, to include a cap and to remove the extended relief designed to provide exemption where property takes time to sell;
• Removal or tapering of the annual CGT exemption;
• Bringing CGT rates more into line with income tax rates, which are much higher.

Given the impact such changes could have on CGT liabilities arising on future disposals, is there anything you could be doing now to minimise your future exposure?

We recommend that clients with capital assets seek professional tax advice and consider whether they have any opportunities to consider a disposal or restructure of assets to help protect them from future increases in CGT rates.

Options to consider might include making disposals or taking action to increase the base cost of assets to protect them against increased rates on future disposals by paying CGT at current rates on current values.

Examples include:

• ‘Bed and ISA’ strategies, whereby shares are sold and re-purchased within an ISA;
• Making lifetime gifts of assets giving rise to a CGT liability, so marrying this strategy with inheritance tax planning;
• Equalizing assets between you and your spouse to ensure maximum use of the annual CGT exemption;
• Considering a disposal of a second home now, to take advantage of the current interest in property due to the temporary stamp duty reduction;
• Enveloping property into a company structure, taking advantage of current CGT rates.

Next steps

The government is hinting that changes will be announced in the November 2020 budget, although a date for this has yet to be announced. We are advising clients interested in reviewing their assets in anticipation of changes to have completed any planning reviews by 31 December 2020 to be fully prepared in the event that a new regime comes into operation on 6 April 2021, for the start of the new tax year.

For more advice on planning ahead for the changes to capital gains tax, please email us at partners@rjp.co.uk