Will Capital Gain Tax increase to fund part of the Covid-19 deficit?

The Chancellor has commissioned a review of Capital Gains Tax (CGT) with a view to identifying opportunities to simplify the tax but it was already suggested by many as a potential route to increase tax revenues and this review has done nothing to dampen such speculation.

The Office of Tax Simplification (OTS) has previously reviewed several parts of tax legislation with a focus on simplification.  The scope of this review into CGT is very wide and includes a review of how present rules may distort behaviour or do not meet their policy intent.  This may well signal alignment of CGT rates to higher income tax rates.

Currently, CGT is at a rate of between 10% (for disposals which qualify for Business Asset Disposal Relief) to 28% where gains are realised on UK residential property which is not covered by principal private residence relief.  When these rates are compared to income tax of up to 45% it is not surprising that many look to maximise their exposure to CGT rather than income tax.

The alignment of the rates of CGT to income tax would increase tax revenue and contribute to the budget deficit which is continuously being forecasted to sour and could hit £350bn this year, more than twice what it could have been without Covid. 

Adjusting the rate of CGT is not the only potential option available to the Treasury.  There are a number of allowances and reliefs that could be revised.  We saw the reduction of Entrepreneurs’ Relief (or Business Asset Disposal Relief as it is now known) to a lifetime cap from £10million to £1million of gains earlier this year and this could be further reduced.  The annual exemption from CGT of £12,300 for each individual could also be reduced.

Principal Private Residence Relief currently provides the exemption from CGT when individuals sell their main home.  Restricting this relief would effectively be an introduction of a form of wealth tax given that much of the country’s wealth is tied up in the value our homes.  

Of course, we already have an obvious wealth tax in the UK in the form of inheritance tax.  CGT may be less obvious and more stealth but it is still a wealth tax.  The rates of CGT were previously aligned with income tax rates until 2008 when a flat rate of CGT at 18% was introduced.  Simpler?  Indeed, but we also lost relief at that time to reduce gains that were taxed to account for inflation so CGT has been paid on nominal gains since then rather than real gains.

Whilst the Treasury may highlight that the OTS reviews are standard practice and that substantial policy changes do not always occur (or certainly occur quickly) it seems likely to many that CGT will be revised in some way and it is possible that changes could be introduced in the Autumn Budget later this year.

The obvious question is what action should individuals, trusts and partnerships take to plan ahead?

CGT is a transaction tax so careful planning is required to ensure that any disposal is sensible from a wider financial and commercial perspective. There are a number of ways in which a CGT event can be accelerated but care needs to be taken to ensure that cash is available to pay the tax.

• Business owners should be reviewing the structures of their businesses and their exit strategies now to check that they are not missing an opportunity to secure relatively modest rates of CGT.  Whilst accelerating a third party sale may be difficult, looking at introducing an element of employee ownership may be beneficial.
• Those who may have recently sold a business but deferred an element of their consideration or retained a minority interest in the purchaser should consider whether they have held over an element of their gain which may become chargeable at higher rates and what options may be available to bring forward the taxing point.
• Those with investment portfolios should look at their portfolios with a view to realising gains to utilise allowances or make gifts to family members to trusts to crystallise gains. 
• Non-UK domiciled individuals (and those who are now deemed domiciled but have existing offshore trusts in place) often pay CGT in the UK on their non-UK assets as and when they remit funds to the UK.  The tax consequences for any non-doms making remittance to the UK is hugely complex but reviewing the need for funds in the UK and either realising gains overseas and/or accelerating remittances to the UK might be a must for many.

The solution will not always be the same but there is inevitably a limited window of opportunity for many to review their position.  That may mean accelerating a tax charge so thinking about the cash flow impact will also be key.

If you would like to discuss the potential consequences for you please get in touch using the form below.