Paying for COVID: Could a Capital Gains Tax Increase Actually Happen?

December 3, 2020 Categories: Budget, Business

It’s impossible to ignore how much the government is spending on keeping the country afloat during the COVID-19 pandemic.

We’re all asking the same question: how is this all going to be paid for? More importantly, who is going to pay for it? And how?

In a letter to the Office of Tax Simplification (OTS) earlier this year, chancellor Rishi Sunak noted that he wanted to make the chargeable gains system “fit for purpose”. Among the reviews he asked the OTS to carry out was, predictably, Capital Gains Tax (CGT).

Does this mean an increase is on the cards?

What has Sunak asked for, exactly?

In his letter to the OTS, Sunak said he’d like a review on all aspects of chargeable gains relating to small businesses and individuals.

He notes that the intention is to improve the experience of those who interact with it by identifying administrative and technical issues. He’s also concerned that the present rules can potentially “distort behaviour”.

Sunak is particularly interested in allowances, exemptions, reliefs, and the treatment of losses within CGT. He wants the OTS to consider how gains are currently taxed compared to other types of income.

If that signals warning bells for you, you’re not alone. The reviews are likely to consider the interaction CGT has with income tax, stamp duty and inheritance tax.

Capital Gains Tax is, admittedly, one of the few taxes that hasn’t been reviewed for quite some time, so we shouldn’t be surprised the chancellor has placed his focus on it when public funds are so badly needed in the wake of the colossal COVID-19 support packages.

When you consider how much wealth is tied up in homes, it’s no wonder that restricting CGT exemptions would give the chancellor plenty of options to refill the coffers.

What could the outcome be if CGT is changed?

We’re in guesswork territory at the moment, but Sunak’s letter to the OTS could result in some of the biggest changes to CGT in the last ten years.

The chancellor’s desire to make it easier for everyone shouldn’t be dismissed as a smokescreen for tax increases, either. As noted by OTS Tax Director Bill Dodwell, people often get confused by CGT when it comes to what the relief covers and exactly how it works.

It’s not dissimilar to the review of inheritance tax in 2018. For instance, back then, the OTS discovered that very few people understood how Taper Relief worked. So, they recommended that it was abolished, along with a reduction in the seven-year period in which gifts are added to the death estate.

We therefore shouldn’t write off any potential big changes to CGT at this stage. But it’s made tricky simply because of how it currently contributes to the government’s coffers. Capital Gains Tax currently raises around £8-10 billion a year from roughly 260,000 taxpayers – many of whom sit within the higher rate of the allowance.

There are two schools of thought when it comes to how CGT should be changed:

  • it should come in line with income tax; or
  • it should be set at a lower rate.

The most favourable option for you will depend largely on your employment and the tax bracket you’re in. But some academics believe the rate needs to be equalised in order to prevent people benefiting from low CGT rates on what they view as income.

If the government decides to equalise the rate of CGT with income tax, it would be a significant rise for the former. At the moment, you can make £12,300 of gains each year free of tax, after which CGT is charged at 10% or 20%, depending on your taxpayer status. Higher rates 18 and 28% are applicable to residential property.

The proposed change would increase those rates to 20% for basic-rate taxpayers and 40% for high earners (not to mention 45% for additional rate payers). The OTS has also suggested potentially reducing the annual allowance for CGT to as little as £2,000, thus bringing far more people into the scope of the tax.

Will the Capital Gains Tax increase happen?

It’s still early days for the review into CGT; the OTS is currently collecting the evidence it needs in order to make an informed decision.

It’s also worth noting that the OTS isn’t looking at large company CGT. Instead, the focus is on how it affects individuals and capital gains within small and medium-sized businesses.

The case for change has unfortunately been strengthened by COVID-19. Tax rises are pretty much inevitable, and areas like CGT that haven’t changed for years are likely to be hit hardest.

With this in mind, there’s never been a better time to invest in assets that are better shielded from tax. So, if CGT plays a big role in your finances, it might be worth looking into ISAs, pensions, and VCTs.

If you’re concerned about what you’ve read today, or have any general questions on CGT, simply get in touch with the Chandlers team – we’d love to help.