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Payback time: New OTS report could spark higher CGT liabilities for taxpayers

18 December 2020

What can be said about 2020? Terms such as pandemic, lockdown, social distancing and furlough became commonplace.

We’ve all had to drastically change the way we live and work this year, and all governments have had to think creatively to put in place steps to try and protect their economies.

Those steps have come at a huge cost and they are going to have to be paid for from somewhere. Most commentators believe that one area that will be changed by the government is Capital Gains Tax (CGT). Unfortunately for the taxpayer, it will not be a change for the better.

In July 2020 the Chancellor asked the Office of Tax Simplification (OTS) to look at CGT, with a focus on individuals. The first report from the OTS was published in November 2020.

It is useful just to highlight a few points about CGT which are summarised in the OTS report:

  • CGT is a tax on the profit when an asset is sold, and it has increased in value.
  • In 2017-2018 £8.3 billion of CGT was paid by 265,000 UK individuals, as against £180 billion of Income Tax paid by 31.2 million taxpayers.
  • Most people do not need to pay CGT, but when it is paid then it is paid in larger amounts. On the above figures the mean liability for CGT is £32,000 whereas the mean liability for Income Tax is £5,800.
  • There are four rates of CGT, which are all lower than the equivalent rates for Income Tax.
  • When a person dies, assets held by that person are uplifted for CGT purposes, i.e. the beneficiary inheriting the assets inherits them at the date of death value rather than the historic acquisition cost.
  • There are reliefs available to encourage business investment. A special rate of 10% for CGT is applied for business owners when they retire (Business Asset Disposal Relief).
  • Investors’ Relief (CGT at 10%) was introduced in April 2016 to again stimulate business investment. However, the OTS heard that there has been little take up for this relief.

There is a perception that the different boundaries and rates for CGT provide opportunities for tax avoidance. This is an area the government is keen to address.

What are the recommendations in the report?

The OTS report also says that, “More closely aligning CGT rates with income tax rates has the potential to raise a substantial amount of tax for the Exchequer”. The report comes up with several recommendations that, if implemented, will have a significant impact for individuals and businesses.

Among those recommendations are the following:

  • Consider more closely aligning CGT rates with Income Tax rates.
  • Consider reducing the number of CGT rates and the extent to which liabilities depend on the level of a taxpayer’s income.
  • Consider reducing the level of the Annual Exempt Amount for CGT.
  • Where a relief or exemption from Inheritance Tax applies, the government should consider removing the capital gains uplift on death, and instead provide that the recipient is treated as acquiring the assets at the historic base cost of the person who has died.
  • The government should consider replacing Business Asset Disposal Relief with a relief more focused on retirement.
  • The government should abolish Investors’ Relief.

It seems to be almost inevitable that there are going to be changes to CGT and those changes will result in higher CGT liabilities for the taxpayer.

Therefore, if gains can be realised, they should be done so as soon as possible, whilst the CGT rates are more beneficial.

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Simon leads our highly-regarded wills, trusts & probate team. He has 25 years’ experience in the field, and is a specialist in complex estate and tax planning. Simon is a member of the Society of Trust & Estate Practitioners and is recommended in The Legal 500 and Chambers High Net Worth

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