You may have read in the press recently that HMRC’s Office of Tax Simplification (OTS) has released a formal consultation to review Capital Gains Tax (CGT), as requested by the Chancellor of the Exchequer.
Given the current climate, it would come as no shock if Mr Sunak is looking for ways to fund the new COVID-19 aid packages. Many will, therefore, have concerns about what the Chancellor might have up his sleeve for the CGT regime.
What does the consultation cover?
The job of the OTS is to simplify both administrative and technical issues. This particular consultation is unusually wide-ranging and does not cover a specific aspect of CGT. The review includes allowances, exemptions and reliefs, treatment of capital losses and the interaction of how gains are taxed compared to other types of income. The OTS is also reviewing the extent to which the current regime distorts decision making by individuals and businesses.
What could change?
It is uncertain what changes could be introduced, and the Chancellor is currently keeping his cards close to his chest.
We do know that at rates of 10% to 28%, CGT is lower now than it has been in the past, and save in very limited circumstances is lower than marginal income tax rates ranging from 7.5% to 45% depending on the type of income concerned.
This differential can serve to incentivise taxpayers to enter into transactions that attract capital rather than income tax rates, and as such HMRC has introduced a lot of measures to tackle artificial and avoidance arrangements over the last few years.
Given that the OTS’s job is to reduce technical issues, a simple, and perhaps a low-cost solution could be to close the gap between income tax and capital gains tax rates by raising the latter. Maybe we could see a return to the approach taken between 1988 and 2008 when capital gains were subject to individuals marginal savings rate of tax, or simply higher rates of CGT as experienced in the past of up to 30%?
Such a ‘quick fix’ approach would not be unprecedented, with many considering that the rise in marginal rates of income tax on dividends in April 2016 was adopted to close the gap in taxation between employed and self-employed individuals, as legislation intended to tackle that gap such as IR35 was proving a poor deterrent and difficult to police.
Are recent CGT changes an indication of what’s to come?
HMRC’s recent changes to the CGT regime have been to erode the reliefs available and accelerate the reporting and tax payment dates.
Examples in recent years include:
- changes to Principal Private Residence (PPR) relief removing concessions for periods of letting otherwise than in shared occupancy scenarios, and
- a tightening of qualifying transactions and a major reduction in the lifetime allowance, which may benefit from the 10% Business Asset Disposal (previously Entrepreneurs Relief) rate of CGT from £10m to £1m.
It will, therefore, be no surprise if the outcome of this new consultation is to reduce reliefs further.
Should I take any action now?
We do not know what the potential changes are, or the timing of these potential changes. We are in unprecedented times, so anything is possible.
Some examples of planning which might yield savings over time assuming that there is an increase in rates of CGT on the horizon include;
- Making any proposed gifts of shares in respect of which no holdover relief is available before any increase in CGT rates. If such gifts are contemplated in the near future, it may be beneficial to execute them now at what would be a comparatively lower CGT rate if rates increase in the future. It may be that the coronavirus pandemic has harmed share value too, which would further reduce any CGT due in respect of such gifts made while values are low.
- Making Business Asset Disposals (in particular where lifetime gains in respect of such disposals will exceed £1m in aggregate) before any increase in CGT rates – If a sale is on the horizon, it may be beneficial to execute it now at what would be a comparatively lower CGT rate if rates increase in the future. However, this should be weighed against the potentially lower disposal consideration if values are currently felt to be low.
- A tax-efficient business reconstruction to ring-fence trading and non-trading activities or surplus reserves which look exposed to future trading risks. This might serve to facilitate holdover relief for shares in a trading entity, or part disposal of an organisation thereby limiting gains exposed to any higher rates of CGT.
- Transfers of ownership interests within marriage/civil partnership – Such action could serve to access two annual exemptions in respect of capital gains on a disposal and thereby reduce total CGT exposure, whether at current rates or any increased future rates.
- Deferring Capital Gains until lower rates of CGT apply – What goes up may come down, and it may be possible to defer any capital gains made at current rates or any increased future rates by making tax-efficient investments under the Enterprise Investment Scheme until rates are comparatively lower.
For the avoidance of any doubt, the above is not an exhaustive list.
Whether planning opportunities are available or appropriate for a person will depend on their particular circumstances and objectives and should be considered on a case by case basis. Should you have concerns in respect of development in the CGT regime and wish to explore planning opportunities available to you, please contact Richard Grimster, Steven Butcher or another member of our Tax team using the form below.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.