Coronavirus borrowing is set to total nearly £300 billion this tax year, giving the UK its largest deficit since World War Two.
A recent BBC report confirmed that the country’s debt is currently worth more than its economy.
While the Chancellor’s Summer Statement – with its VAT reduction and Stamp Duty holiday – was designed to get the economy moving again, it is increasingly likely that his next budget will include measures to reduce the gap between spending and tax income.
On 14 July, the Chancellor announced a review into Capital Gains Tax (CGT), to be undertaken by the Office of Tax Simplification (OTS).
The review intends to ‘identify simplification opportunities’ by reviewing the tax’s current rates, exemptions, and allowances. In reality, the review looks set to open the way for CGT reform. And with the consultation closing on 12 October, the OTS’s recommendations could be announced in Rishi Sunak’s next budget.
So, what changes might the Chancellor make? And how will they affect you?
Possible CGT changes
The Telegraph reports ‘almost 300,000 people paid the levy in 2017/18, according to the latest figures from HM Revenue & Customs, generating just under £9 billion in revenue’. By comparison, Income Tax generates more than £190 billion per year.
Possible reforms that the Chancellor could make to increase CGT income include:
- Increasing the rate payable
The top rate of CGT stands at 28%. Simply increasing this rate would be one way to boost government income from CGT.
Under current rules, a basic rate taxpayer is liable to CGT at 18% on gains from second homes and Buy to Let properties, and 10% on other assets. If you are a higher rate taxpayer, the rates increase to 28% and 20% respectively.
- Aligning CGT and Income Tax rates
Labour proposed bringing CGT into line with Income Tax rates in their 2019 manifesto.
Raising CGT to 20%, 40%, and 45% for basic, higher, and additional rate taxpayers respectively, would mean big tax rises for higher earners but smaller increases for basic rate taxpayers.
- Aligning CGT with dividend tax rates
The current Dividend Allowance is £2,000 per tax year, with any income from shareholdings above that amount taxed at 7.5% for a basic rate taxpayer, 32.5% for a high rate taxpayer, or 38.1% for an additional rate taxpayer.
Aligning CGT with dividend rates would see CGT liability rise for higher earners.
- A change to the exemption for primary homes
‘Main residence’ relief costs the Treasury more than £26 billion a year. Taxing homeowners when they sell their own property would generate additional income for the government but could be an unpopular decision.
The Chancellor’s recent Stamp Duty freeze – as announced in his Summer Statement – is intended to get the property market moving again. A change to Primary Residence Relief could have the opposite effect.
- Amending other reliefs and allowances
Some capital gains lie outside of the current system, including gambling winnings, and wine and car investments. Removing these exemptions could be an easy way to increase CGT revenue.
Business Asset Disposal Relief – formerly ‘Entrepreneurs’ relief’ – was recently cut from £10 million to £1million. Might it be reformed again?
What changes mean for you
Although we can’t say for sure what changes the Office of Tax Simplification (OTS) will recommend – or how the government will act on those recommendations – changes do look increasingly likely.
How the changes affect you will depend on where your CGT liability arises.
A rise in CGT rates to align with Income Tax could mean a sharp rise in tax payable on a second home or Buy to Let disposals. Meanwhile, business owners will be keen that the government avoids reducing – or even abolishing – Business Asset Disposal Relief.
With changes likely in the next budget, you might only have a few months in which to take advantage of current CGT rules. If changes to the current allowances and exemptions would affect you, speak to us and we can help you manage your liability now.
Get in touch
Please contact us if you’d like to discuss the best ways to manage your CGT liability.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation which is subject to change.