Following on from the Chancellor’s request for a review of capital gains tax, the Office of Tax Simplification (OTS) has undertaken a study and has recently published its findings. In its report, the OTS highlights several areas that are currently not fit for purpose. In this article we will focus on the proposed changes.
Given the recent increase government expenditure due to Covid-19, it is not surprising that the Chancellor is reviewing different ways to increase the tax take. One such option is to increase revenue from capital gains tax, which is charged on the profit made when selling certain assets (such as property or shares).
Capital gains tax in the UK has recently come under the political spotlight, partly due to the rates being significantly lower than those currently charged for income tax. In order to try and remove any political biases from future decisions, the chancellor has tasked the OTS with reviewing the tax and its effectiveness in the UK.
What are the current rates of capital gains tax?
Currently there are four rates of capital gains tax.
- Capital gains falling within the basic rate band of tax (up to £37,500) – charged at 10%
- Capital gains over the basic rate band limit – charged at 20%
- Capital gains on residential property and carried interest
- falling within the basic rate band of tax (up to £37,500) – charged at 18%
- over the basic rate band limit – charged at 28%
- Capital gains qualifying for Business Asset Disposal Relief (up to the £1,000,000 lifetime allowance) – charged at 10%
Each UK taxpayer is also entitled to an Annual Exemption. The Annual Exemption grants a tax free allowance and is designed to allow those with relatively small gains to avoid paying any tax and to prevent the requirement to file a UK tax return. For the 2020/21 UK tax year the Annual Exemption below which no capital gains tax is chargeable is £12,300.
It is worth noting the OTS can only make recommendations and it is up to the chancellor to decide on a policy direction and implement it. However, the OTS has recommended the following changes.
Capital Gains Tax Rates
- Greater alignment of income tax rates and capital gains tax rates to reduce the disparity between them. Currently, the top rate of income tax is 45% whereas the top rate of capital gains tax is only 20% (or 28% on residential property / carried interest)
- Review of the capital gains tax rate bands and the relation that has to the amount individual pays
- A reduction in the number of capital gains tax rate bands from four down to two different rates
The OTS has made certain recommendations for the Annual Exemption as follows
- If the Government considers the purpose of the Annual Exemption to be administrative (i.e. in order to reduce the number of people filing UK tax returns), they should consider reducing its level. The OTS state that “a true de minimis level lies in the range between £2,000 and £4,000”, however this amount will ultimately be decided by the Government.
- If the Annual Exemption is reduced, the Government should consider the following
- Introducing broader exemptions for personal affects
- Formalising the arrangements for real time reporting of capital gains into the taxpayers HMRC account
- Exploring requiring investment managers and others to report capital gains tax information to both the taxpayer and HMRC in order to make compliance easier.
What does this mean for you?
Potentially nothing at this point. It all depends on what the Chancellor decides to do next.
Given that there is a large hole in the Government’s finances it seems likely changes to capital gains tax will be implemented as less taxpayers are affected relative to income tax adjustments.
When these changes come into effect is another matter. It is unlikely that any changes will be introduced until the Spring Budget next month. After the announcement it is likely the changes will come into force from the start of the new tax year on the 6th April 2021, however, the Government could make the changes effective in respect of any disposal of assets following the date of any announcement.
One issue of any reduction in the Annual Exemption will be an increase in the number of individuals registering for self-assessment. An estimate by the ‘Low Income Tax Reform Group’ reported that an additional 250,000 taxpayers could be forced to file tax returns if the change in rates to the Annual Exemption go ahead. This could present several difficult political choices for the Government, who have consistently portrayed themselves as the party of low tax and low regulation. This increase in administration could prove unpopular and there may be a reluctance to introduce any changes.
What form any potential changes will take is also somewhat unknown, as the OTS did not provide any recommendations on what the revised capital gains tax rates should be. Currently the UK is in the middle of the pack for capital gains tax rates with the European average being 19.9% according to the US based ‘Tax Foundation’. Any large movements in the UK capital gains tax rate could result in a reduction in competitiveness just as the UK leaves the Brexit transition period.
However, there is a wider global trend of reviewing capital gains tax rates. In the US, for example, Joe Biden has already proposed changes for taxing long-term capital gains at the ordinary income tax rate of 39.6 percent on income above $1 million.
What can you do to mitigate your capital gains tax exposure?
Fortunately, taxpayers will always have some control over the payment of capital gains tax. Unlike income tax, it is possible to decide when to sell an asset and trigger any capital gain, allowing some degree of control, should any changes be announced. There are also several reliefs available which allow the deferral of capital gains tax, such as the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS), Social Investment Relief (SIR) and Business Asset Disposal Relief. In order to take advantage of any scheme, it is important to plan and consider the tax implications of any investment.
It is also important to consider the impact of moving overseas. There are currently very strict rules on capital gains tax those choosing to leave the UK prior to disposing of assets, including the temporary non resident rules, which ensure that gains will be caught unless an individual disposes of an asset whilst non UK resident and does not resume UK residency within 60 months of leaving. It is also essential to ensure that the residency requirements are met in the overseas country and taxing rights are awarded to that jurisdiction under a tax treaty with the UK and that the rate of tax charged is lower than the UK, which can limit the number of available options. Even with a successful long-term strategy in place, gains on the sale of UK property are now potentially chargeable to capital gains tax regardless of an individual’s tax resident status and it will be important to ensure such gains are not taxed in both the UK and the country of residence.
At GTN, we can offer our assistance in helping carefully plan the mitigation of capital gains tax on UK and overseas assets and ensure all available reliefs are claimed. It’s important to always consult your tax adviser before making any decisions on triggering capital gains, particularly with the potential changes ahead. In conjunction with our network of partner firms, we are be able to provide effective planning and compliance on a global basis.
As always, we will keep you updated with any announcements as soon as the Government announces them. In the meantime, should you wish to discuss your tax affairs further or have any questions about this article and how you may be impacted, please do not hesitate to contact us by calling 0207 100 2127 or via sending us an email.