Will a review of Capital Gains Tax see a future rise?
You may have spotted in the headlines that Chancellor Rishi Sunak has asked the Office of Tax Simplification to review the capital gains tax system to ensure it remains “fit for purpose”.
Whilst the Treasury played this down, stating “this is standard internal working” and adding that “there is no expectation or plans for policy changes as a result”, experts are speculating whether this could lead to a ‘tax grab’ in the autumn budget and open the door to higher taxes for the wealthy.
Generous government interventions during the coronavirus pandemic have created a significant budget black hole, with UK borrowing set to hit its highest level in peacetime history. Reducing this deficit is likely to involve tweaks to the fiscal policy, so CGT may be targeted as a means of raising funds. Remember the government has little wiggle room as they made a manifesto promise of no rises in income tax, national insurance or VAT.
CGT rates are currently set at 10% for basic-rate taxpayers and 20% for higher and additional-rate taxpayers, or at 18% and 28% where gains relate to residential property. UK taxpayers also receive an annual £12,300 tax-free allowance to offset against capital gains.
While the top rate of income tax is 45% and 40% for people earning more than £50,000, the average CGT paid on the sale of assets is only around 15%. Given those who pay CGT are twice as likely to pay higher-rate income, it is understandable why some view the current system as unfair and a means of wealthy households exploiting tax avoidance to pay too little for the sale of second homes, works of art and stocks and shares. Last year, left-wing think tank the Institute for Public Policy Research called for CGT to be taxed at the same rate as income tax, suggesting that the change in legislation could raise £90bn over the next five years.
So what changes may we see?
There are several ways CGT revenues could be increased; a reduction or abolition of the CGT tax free allowance; an increase in rates to align more closely with income tax rates; changes to exemptions, reliefs and the treatment of losses, or a combination of these measures. Simplifying the CGT system could benefit individuals previously caught out by disposals and potentially encourage the older generation to pass on wealth during their lifetime. Remember that this review will investigate how capital gains are taxed for both individuals and smaller businesses and the scope of the OTS investigation even includes principal private residence relief, so there is scope for significant change.
The OTS has published a dual call for evidence from the review. The first part asks for comment on the principles of CGT by August 10, with the second part seeking responses on technical detail and practical operation of CGT by October 12. This fits the timeline for the Autumn budget that is also set to be in October albeit with a date yet to be announced.
Whilst this review has been played down, the Treasury expects to see significant falls in CGT revenue over the next 2 years as the value of property and other assets drop. This knock on effect of the pandemic adds further pressure to the Chancellor to consider the current CGT system. There will inevitably be pushback from Tory MPs on what could be seen as an increase in tax for the wealthy, but having witnessed the Chancellors reversal of Tory orthodoxy in the March budget, change is not unexpected.