Changes to the Capital Gains Tax regime could feature in the next Budget
In July, the Chancellor asked the Office of Tax Simplification to consider the overall scope of Capital Gains Tax (CGT), looking at reliefs, exemptions, allowances, the treatment of losses and how gains are taxed compared to other types of income.
Many commentators are suggesting that it therefore seems likely that an increase in CGT could be one of the changes the Chancellor will introduce to fund the deficit created by the coronavirus support measures.
The budget, which was due to be held in the Autumn, has been postponed until Spring so this gives us a few more months of certainty in the tax regime before any changes are announced and come into force.
Obviously, we do not know what changes will be made, but here are some suggestions:
1. Increase the rates of CGT to bring them into line with Income Tax Rates
Current rates of CGT are 10% and 20% (or 18% and 28% for residential property).
One suggestion is that these could be aligned with income tax rates which are currently 20%, 40% and 45%.
Another possibility is that rates of CGT could be aligned with the rates of tax charged on dividends (£2,000 allowance and then taxed at 7.5%, 32.5% and 38.1%).
Either of these changes could significantly increase the tax take from CGT.
2. Reduce CGT reliefs
There are several CGT reliefs which can reduce or remove your CGT liability.
Holdover can apply to gift of business assets, including shares in your personal trading company and gifts which are chargeable transfers for Inheritance Tax purposes (gifts into trust).
If you make a gift of assets, you are treated as making a transfer at market value even though you have not received any proceeds from the transaction. This could leave you with a sizeable CGT bill but no cash proceeds from which to pay it.
At the moment, you can claim Holdover relief on qualifying gifts which means that you do not have to pay any tax now. Instead, the tax is deferred until the assets are eventually sold.
We often claim this relief on behalf of clients, whether this is because they are giving away business assets as part of succession planning for the business, or whether they are setting up a trust to protect assets and provide for the next generation.
If this relief were to be abolished, it would have serious implications for the way individuals can pass on wealth to the next generation without incurring a large tax liability.
Business Asset Disposal Relief (Formerly Entrepreneurs’ Relief)
The Budget in March saw a big reduction to the lifetime allowance from £10m to just £1m. If this relief applies, the whole of the gain will be charged to CGT at the rate of just 10% rather than at any of the higher rates of CGT.
It is possible that the Chancellor could seek to further reduce, or even abolish, this relief?
Private Residence Relief
Private Residence Relief is generally available when you sell your own home and means that you do not have to pay CGT on any profit made.
It seems unlikely that this would be abolished, but there could be some changes to the rules applied to periods of absence from your home, that would increase the tax payable.
Inheritance Tax reliefs
It has also been suggested that there could be changes to Inheritance Tax (IHT) reliefs.
The current exemptions and thresholds for lifetime giving could be simplified and replaced with a restricted personal gift allowance.
Reducing the 7 year rule (after which time lifetime gifts are no longer included in the death estate when calculating the IHT liability) to a 5 year rule but removing the taper relief which can currently apply if a person survives for more than 3 years after making the gift
Removing the CGT uplift on death and replacing this with a no gain, no loss approach where an IHT exemption applies would increase the tax payable.
Increasing the trading threshold for business property relief to apply. At the moment, the relief can apply if a company’s activities are at least 51% trading, but this could be increased to 80% which could see far fewer businesses qualify for this valuable relief.
Also, the rate of business property relief was not 100%, but only 50% up to 1992. Taking the rate back down to 50% would significantly increase the tax payable by individuals owning their own businesses.
All of the above could have a big impact on the amount of IHT payable meaning that the amount which passes to your beneficiaries will be reduced.
Nothing is certain, but if you are already considering selling assets, making a gift of business assets, making a gift into trust or carrying out IHT planning in the near future, it might be worth completing the transaction before budget day to ensure your entitlement to these reliefs will not be lost.
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