The reduction of the CGT exemption – what is the true extent of its impact?

HMRC data has revealed a substantial increase of 96% in the number of Capital Gains Tax (CGT) receipts over the past 5 years. Many people are now situated within higher tax brackets due to the increase in the value of assets and the Government’s decision to freeze income tax thresholds until 2027-2028 – despite for some income not growing sufficiently to keep up with inflation.

The number of CGT receipts is expected to continue rising due to the reduction of the annual exemption from £12,000 to £6,000, which was effective from 6 April 2023. In April 2024, the exemption rate it has been forecast will increase further to £3,000, so it is thought that the full extent of the CGT receipt increase will not be evident until next year.

How much will HMRC earn as a result of these changes?

While the boost in CGT revenue may initially seem positive for the Treasury, with the Office of Budget Responsibility forecasting £26.1 billion in CGT revenue by the 2027-28 tax year, the reality is more complex.

CGT has traditionally been perceived as a tax on wealth, typically paid by individuals with substantial investments, valuable assets, and access to professional advice for accurately reporting taxable gains. However, the reduction in the annual exemption means that a significant number of new taxpayers will now be liable to pay CGT, with many now having to seek tax advice for relatively small sums.

What impact will this have on HMRC?

The majority of individuals fulfil their CGT obligations via self-assessment tax returns (SATR), and some are perhaps unaware that gifts of properties or shares to family members can still be subject to CGT.

With an increasing number of SATR, HMRC are faced with the threat of a significant administrative burden. Plans are in motion to develop a more efficient digital tax system by 2030, however short-term challenges and uncertainties remain.

Where does this leave tax payers?

The increased number of taxpayers liable to pay CGT does raise some concern. Typically, seeking professional advice is recommended in response to changes in tax policy, with ignorance of the rules being no excuse for non-compliance. However, for individuals facing tax obligations on relatively modest sums, the cost of consulting a tax specialist may not be financially viable.

SATR can also be a daunting task, leading to an increased likelihood of errors. There are also other digital ways CGT can be prepared to HMRC online, however this is also not without its practical difficulties. HMRC will need to address these errors to ensure accurate tax collection, and they will bear the responsibility for collecting late filing penalties and interest on underpaid tax.

Short deadlines

In addition, any capital gains made on the sale of UK residential land and property have to be declared to HMRC within 60 days on another bespoke digital return.  Therefore HMRC are making it difficult for individuals to know which method of disclosure to use as there are numerous now.

Please speak to an advisor immediately if you are planning to sell land or property, or if you have done so since April 2020 and not previously notified HMRC of this..

What does the future hold?

Considering these challenges, the concern intensifies when considering the further reduction of the annual exemption in April 2024, which will broaden the taxpayer base for CGT. Perhaps HMRC may find themselves in a position where the cost of pursuing individuals for unpaid CGT exceeds the value of the outstanding tax itself.