Capital Gains Tax under reviewSep 2nd, 2020
In July 2020, Chancellor Rishi Sunak asked the Office of Tax Simplification (OTS) to review CGT and aspects of Corporation Tax that relate to capital gains for smaller businesses.
This matters a lot to our clients, since the law compensates at least some of their future losses in the form of a capital sum, which must be invested to preserve its value, and upon which gains are anticipated. The resulting taxation will therefore erode capital, particularly if it turns out to be at a higher level than allowed for in the personal injury discount rate.
For some time, we have been advocating realising capital gains whilst tax rates are relatively low, in anticipation of higher taxes in the future. Given the scale of government borrowing since the Covid19 pandemic, it now seems a question of when CGT rates will increase, and not if.
CGT was introduced in 1965 by Labour Chancellor, James Callaghan, on gains made on the disposal of assets by individuals, trustees and estates.
Between 1980 and 1988, the rate of CGT was 30%. Thereafter, until 2008, capital gains were treated as the top-slice of income, and the tax was charged at the same rates applied to income (10%/20%/40%). Another Labour Chancellor, Alastair Darling, set a single 18% CGT rate from 6th April 2008. A higher rate band of 28% was introduced by the Coalition Government in 2010-11.
The current rates for individuals are 10%/20% or 18%/28%, with the higher rates applying to disposals of residential property not used as one’s own home.
CGT is a ‘modest’ source of revenue for the Exchequer. In 2017-18, gains subject to CGT (net of losses but before deducting the annual exempt amount) were £57.9 billion, upon which tax due was £8.8 billion. This gives an average tax rate of 15%.
It is therefore not surprising that the Exchequer is looking at ways in which more revenues can be raised from CGT.
So far as the general principles of CGT (its scope and reach) are concerned, the period for submitting evidence to the OTS is extremely short: responses must be received by 10th August 2020. Responses on the main section of the call for evidence must be made by 12th October 2020. Details of the areas in which ‘simplification opportunities’ are to be explored are set out in the Scoping Document published by the OTS.
Most CGT is paid by a relatively small number of taxpayers on relatively large gains. Most of those with gains are able to realise them tax-free within the annual exempt amount. In 2017-18, almost two-thirds of the CGT revenue raised was from those with gains of £1million, or more, and more than two-thirds of those who paid CGT in 2017-18 did so only once in the 11 preceding years.
It would not be surprising if change were fashioned around these ‘average’ taxpayers: personal injury claimants are in a different position. By and large, gains will be taken more frequently, on lower amounts, but in many cases well above the annual exempt amount.
One thing seems certain: where appropriate, and with advice, paying CGT at the current rates seems like a bit of a bargain.