Last week the Chancellor of the Exchequer commissioned a review of Capital Gains Tax (CGT) in relation to individuals and smaller businesses, asking the Office of Tax Simplification (OTS) to consider the overall scope of the tax and the rates which apply, also looking at reliefs, exemptions and allowances.
In his letter to the OTS the Chancellor wrote: “I would like this review to identify and offer advice about opportunities to simplify the taxation of chargeable gains, to ensure the system is fit for purpose and makes the experience of those who interact with it as smooth as possible…. In particular, I would be interested in any proposals from the OTS on the regime of allowances, exemptions, reliefs and the treatment of losses within CGT, and the interactions of how gains are taxed compared to other types of income.”
At this stage this is simply a review, but at a time of extremely high government expenditure and reduced economic performance it is reasonable to expect that the Chancellor will be considering the best means of finding additional tax revenue. The Chancellor has already tweaked CGT rules – his debut budget in March saw him reduce the lifetime limit of entrepreneurs’ relief from £10m to £1m.
One comment in a news article stated the opinion that any rise in CGT rates “might put some people off investing entirely”, although this is perhaps a little dramatic. Rates of CGT are currently much lower than they were 15 years ago, when they mirrored income tax rates (although individuals were previously entitled to indexation/taper relief). Back then any chargeable gain on an investment portfolio would result in a tax rate of 40% for a higher rate taxpayer – today it is 20% (chargeable residential property gains are 28%). For a basic rate taxpayer the standard rate is 10% (18% for residential property), and every individual has an annual exempt amount of currently £12,300. We have freedom from CGT in ISAs and pensions, and there are various other exemptions and reliefs. It can be argued that we have never had it so good for Capital Gains Tax.
We cannot be sure what the outcome of the Chancellor’s review will entail, but we cannot be surprised if either rates increase, and/or there is a scaling back on some of the reliefs and exemptions. Mr Sunak is a highly educated man, however, and has spent many years working in the investment industry so we would hope he is mindful that investing is good for the economy and should be encouraged. As always, there is a balance.
Investors holding portfolios with capital gains may question whether they should take any action now or await the outcome of the Chancellor’s review. It is not a new situation for CGT rules to be reviewed, but in this case it seems reasonable to be prepared for a more penal regime. It is of course possible that the Chancellor may be expecting people to act in advance of the outcome of the review, thus potentially increasing CGT revenue.
If this matter is of concern to you, please contact us.
Please note, Information is based on our current understanding of taxation, legislation and regulations. Any levels and bases of reliefs from taxation are subject to change.
The Financial Conduct Authority does not regulate tax planning.
Tax treatment is based on individual circumstances and may be subject to change in the future.