The Proposed Changes to Capital Gains Tax


As the Government charts our path back to relative normality, the Treasury is beginning to consider how they are going to pay for the extra expenses the pandemic incurred.


One area which looks set for changes is Capital Gains Tax (CGT). The current Chancellor, Rishi Sunak, requested a review into CGT all the way back 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.


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:


Table showing the proposed changes for Capital Gains Tax (CGT) in 2021. CGT rates are expected to 20% for basic rate taxpayers, 40% for higher rate taxpayers and 45% for additional rate taxpayers

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.


Despite these recommendations, the Government confirmed in the March 2021 Budget that the personal allowance for CGT will be frozen until 2026.


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 £12,300). 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 276,000 people paid any CGT last year.


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.


If you still want more information on this matter please click here for the extended version of the document or get in touch with your adviser.



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