Capital Gains Tax: When ‘Simplify’ Really Means ‘Multiply’
The Office of Tax Simplification has just released its proposals to simplify the Capital Gains Tax (CGT) regime by bringing the rates at which tax is paid on gains in line with those charged on income tax.
Given that the chancellor only commissioned the report in July and in its own words it was “produced in a shorter than usual timeframe”, one wonders if this is really about simplification or is rather an attempt to increase the tax take in light of the downturn caused by the COVID 19 pandemic.
Rates of CGT are generally lower than those of income tax because investments are generally made out of income which has already been taxed, to reflect the long term risk of the investments and to encourage saving and investment.
Currently, tax rates on gains vary between 10% and 28% with an annual allowance of £12,300 up to which no tax is payable. According to the report £14bn could be raised by, amongst other things, raising the tax rates to as much as 45% and reducing the Annual Exemption Allowance to £4,000.
Some have noted that only around 265,000 people pay CGT in any year and therefore even if tax rates are doubled, the changes are unlikely to affect most of the population. However, consider the following scenarios which are common and may affect you:
Many people invest in the stock market or in properties in order to fund their retirement. If a basic rate taxpayer had a modest portfolio of quoted shares which would realise a gain of say £15,000 under current legislation they would pay tax of £270. Under the proposed changes, the tax would be £2,200!
A retiree who is a higher rate taxpayer and has utilised the Annual Exemption may have invested in a second property which will realise a gain of say £250,000. Under the current rules CGT payable at 28% would be £70,000 whereas at the proposed 45% rate tax of £112,500 would arise.
There is some relief within the proposals. Indexation allowance which adjusts the base cost of the asset to compensate for inflation and which was actually abolished because it was deemed to be too complex is going to be reintroduced.
The 135 page report suggests that the way the CGT regime is currently structured is counter intuitive and distorts taxpayer behaviour. This has always been the case and I would argue that government actually uses the tax regime to drive behaviour by offering specific tax charges and incentives. Although this is just a proposal document and it is unlikely that all the recommendations will be implemented, the proposals are already likely to influence behaviour with investors potentially seeking to crystallise gains before legislation in enacted.
If you believe you might be affected, please get in touch so that we can review your investment portfolios and businesses structures and assist with any planning opportunities.