The new government review, commissioned by Rishi Sunak, has suggested that the amount of tax levied on capital gains should be raised by billions of pounds. This will principally affect those who own second homes (including landlords) or assets not shielded from tax.
The review was launched by Mr Sunak as part of his strategy to help relieve the enormous costs of the coronavirus pandemic. The government’s priority right now is to protect the UK economy, and it is estimated that around £14bn could be raised by cutting capital gains tax exemptions and doubling rates.
If these recommendations are taken on by the government, thousands of taxpayers may be taxed heavily on profits made from selling second homes or investments.
Tax is currently levied at 10% for basic-rate taxpayers and 20% for higher-rate taxpayers; it could be doubled if it were brought in line with income tax.
CGT is charged at 18% for lower rate and 28% higher rate on residential property gains.
Capital gains tax refers to the tax you pay on the profits (or gain) made when you sell, give away, or dispose of something you own – e.g. shares or property.
The allowances and reliefs that can be claimed change regularly with legislation and rates can vary. Therefore, it is vital to seek professional advice and put in place effective pre-transaction plans before disposing of an asset to minimise, defer or even eliminate the tax burden and maximise the available relief.
Presently, the first £12,300 of capital gains is exempt. About 50,000 taxpayers reported profits narrowly under that threshold last year.
An independent tax adviser has also suggested scrapping the rule which allows capital gains tax to be wiped on inherited assets, as well as removing relief for investors selling shares in unlisted companies who have had them for a minimum of three years.
However, these findings and figures may not be as detrimental to you and your business as they appear. Government response to this information is in its infancy, and Mr Sunak does not have to accept the findings of this report.
According to Andy Verity, BBC Economic Correspondent, more than 31 million people currently pay tax on their income, which raised £180bn in 2017/18. By contrast, only 265,000 currently pay tax on capital gains.
Remember that the first £12,300 of capital gains is exempt. Because you can control when you sell an asset and realise a gain, businesses can arrange their affairs so any gain they made comes just in under the threshold. And when they do pay capital gains tax, it’s at half the rate of income tax.
Things to consider:
- Rates of tax rates for gains chargeable to CGT are set to increase in the future. Bringing the rates more in line with income tax rates 20%/40%/45%
- The annual allowance of £12,300 looks likely to be reduced significantly
- Share based reward schemes are likely to be targeted to increase the tax raised
- Accumulated earnings in companies may be an area HMRC look to raise further tax revenue by taxing as income when a business ceases
- When assets are inherited from an estate the cost inherited by the beneficiary for CGT purposes may no longer be based on the market value at the date of death. Instead, it may be the original cost of the individual who passed away, or potentially the market value at 2000. This is likely to result in a lot of CGT tax being paid by beneficiaries if they sell assets they inherit from someone when they pass.
If you are concerned about the implications this may have on you and your business, get in touch with our team of qualified tax specialists.