The Proposed Changes to Capital Gains Tax
Since the pandemic looked to be truly over, the world has faced a variety of economic problems; high inflation, slow growth and issues in the job market to name a few. The Treasury does not just have to deal with these, but also work out how it is going to pay for the extra expenses the pandemic incurred.
One area which looks set for changes is Capital Gains Tax (CGT). Rishi Sunak, requested a review into CGT all the way back when he was chancellor in June 2020 by the Office for Tax Simplification (OTS). The resulting November 2020 report has illustrated several ways the government can simplify CGT, as well as increasing their revenues.
The new labour government are under increasing pressure to reduce the deficit and bolstering growth without increasing taxation on the poorest. Chancellor Rachel Reeves has pointed to a £22bn hole in the public finances that she plans to begin to address in her first budget on the 30th October 2024. CGT and IHT could very well be in the firing line. Below are some measures backed by the Office of Tax Simplification (OTS) that will remain on the desk of the Chancellor over the coming years.
This article is to inform you of the proposed changes to CGT, including for inherited assets. The proposed changes may have a considerable impact on your future tax liability. However, these changes are not guaranteed to take effect and this article is not recommending any particular course of action. In most cases, even if all the proposed changes do go ahead, adjustments won’t necessarily have to be made before the next tax year.
Most of our clients will not need to act, but we appreciate each of our client’s circumstances are different. In a minority of cases it may be worth taking precautionary action due to the significant implications of these potential changes. You should get in touch with us if you would like to discuss this further.
If you would like to read a more in-depth article about the proposed changes to CGT and inheritance tax (IHT), including scenarios where CGT liability has been calculated under the possible new rules, and changes that can be made to reduce the amount of CGT you pay, please click here.
Changes to CGT rates
The OTS recommended that CGT rates are brought in line with income tax. This could result in a significant increase in CGT rates if this recommendation is implemented. The changes in tax rates could be as follows:
The previous Conservative government temporarily dropped the rate at which Higher and Additional rate taxpayers pay CGT on property to 24% from April 2024, claiming this will increase revenues due to a higher level of property transactions.
Changes to the CGT allowance
The OTS report also recognised that many people are avoiding any tax liability by using up their CGT allowance every year. The report recommended significantly reducing the CGT allowance to make sure more gains are captured by the tax. This means the value of assets one can cash in without paying tax could be much smaller. The OTS recommended the new personal allowance be reduced from £12,300 to between £2,000 and £4,000.
Although the Government confirmed in the March 2021 Budget that the personal allowance for CGT will be frozen until 2026, Jeremy Hunt in his Autumn Statement has backtracked on this. The CGT personal allowance has already been halved to £6,000 in April 2023, and again to £3,000 in April 2024. This will bring the CGT personal allowance in line with the OTS report’s recommendations.
Changes to CGT on inherited assets
The OTS recommended that the ‘CGT uplift’ on the inheritance of assets be removed by the government. Currently, the uplift means that the gains on assets are reset when they are received through inheritance.
For instance, if person A sold assets totalling £300,000 which they purchased at £200,000, CGT would be payable on the difference between the price of purchase and the price of sale. In this case £100,000 (minus their CGT allowance, currently £3,000). If person A died and left their assets to person B under the current rules, the gains are wiped out. Meaning that person B could sell those assets for £300,000 and pay no tax.
Removing the CGT uplift would mean that the taxable gains of the assets are not uplifted to reflect their value on the date of person A’s death. In the above example, person B would inherit the cost to person A (£200,000) and realise a gain on immediate sale just as person A would have done (£100,000 – with their own CGT allowance potentially being available).
This means that inherited assets over the inheritance tax allowance of £325,000 could be taxed twice. As well as paying 40% inheritance tax on anything over the allowance, CGT would have to be paid on the event of the asset’s sale.
Conclusion
It is not yet known whether some or all of these recommended changes are going to be implemented next year. Yet it is clear that once the effect of the pandemic fades the government is going to be looking for new ways to increase its revenues. Tax increases are never popular with the voters they affect. Which is why CGT is likely to be a prime target for increases. The burden of CGT does not fall on the majority of UK citizens. Only around 394,000 people payed in 2021/22.
If you were planning to sell a property, business or other assets on which there are significant gains within the next few years, it may be worth reviewing your plans within the context of these potential changes.
For more information please click here for the extended version of the article or get in touch with your adviser.
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