Rishi Sunak, the chancellor, this week commissioned the independent Office of Tax Simplification to investigate how capital gains tax is paid by individuals and smaller businesses. At a time when the public finances have been rocked by the pandemic, the announcement has caused nervousness among wealthy people, business owners and their advisers, who fear it is a prelude to increased taxes.
FT Money looks at what changes could be on the cards, who may be affected and what, if anything, people should do.
What is the purpose of the review?
The OTS’s statutory role is to advise the government on how to simplify the tax system. However, the scope of what the chancellor has asked it to research regarding CGT is notably wide-ranging.
It includes all allowances, exemptions and reliefs associated with CGT, the treatment of losses within the tax and its interaction with other levies, such as inheritance and income tax. As well as technical and practical issues, the review will also explore areas where the current rules distort behaviour or do not meet their policy intent. This will help ensure the system is “fit for purpose”, Mr Sunak said.
Katharine Arthur, partner at accountancy firm haysmacintyre, says the “free rein” given to the OTS suggests there could be major changes ahead.
“This has potential to be a fundamental rejig of a complete area of tax, which could be hugely significant for both individuals and small businesses,” she warns.
What could change?
Of the many options available to the chancellor, one area advisers are flagging is an equalisation of CGT and income tax rates.
“CGT is generously low at just 20 per cent for higher and additional rate income taxpayers, who would pay 40 to 45 per cent on their income,” says Joe Cobb, partner at JMW Solicitors.
This gives wealthy people an incentive to structure investments so as to generate capital gains rather than income. “For the average taxpayer, it isn’t possible to structure wealth generation as anything other than taxable income,” he adds.
Nimesh Shah, chief executive at accountancy firm Blick Rothenberg, believes there is a good argument for one flat rate of CGT. Currently there are five rates: 0, 10, 18, 20 or 28 per cent. Individuals pay CGT on gains above an annual tax-free allowance of £12,300 and the rate depends on whether gains are on residential property and/or paid by higher or additional rate payers.
Could there be changes to the principal private residence relief, a tax break that allows individuals selling their main home not to pay CGT? It was worth £26.7bn in 2018-19, according to the National Audit Office.
The OTS’s official scoping document suggests it will only consider “the practical operation” of this relief. But advisers believe this could still allow big reforms. Some speculate the relief could become subject to a per transaction or lifetime cap or abolished completely. Any would be highly contentious.
Zena Hanks, partner at accountancy firm Saffery Champness, suggests there could instead be clearer codification of what counts as an individual’s main private residence. This is an area of focus for the tax authorities who are concerned about the relief being used by people with multiple homes who split their time between them. “There are a lot of grey areas there,” she says.
Another area that could change is the capital gains uplift that currently applies when a person inherits assets. This allows assets to be acquired at the market value on the date of death, rather than the amount originally paid for it. Last year, in its review of IHT, the OTS recommended the uplift be removed in cases where IHT exemptions or reliefs apply. “It’s a very generous relief, so I could see that it might go,” says Svenja Keller, head of wealth planning at broker Killik & Co.
Mr Sunak has also tasked the OTS with looking at how CGT is paid by small businesses. This will include “the position of unincorporated businesses and standalone owner-managed trading or investment companies”. The OTS is to investigate how these companies set up, settle up, sell or wind up these businesses. This could spell restrictions in various reliefs attached to incorporating businesses, according to Julia Rosenbloom, partner at Smith & Williamson. “There are some circumstances where if you move assets into a company, capital gains on those assets are essentially wiped out through an uplift in base cost,” she says.
In addition, companies pay tax on capital gains at corporation tax rates of 19 per cent, a lower rate than is paid by individuals. “The CGT rate for residential property is 28 per cent, so for buy-to-let investors there is a clear advantage in holding residential property in a company,” Ms Rosenbloom adds.
There could be greater restrictions on the ability to offset losses against the CGT allowance. Currently, these can be carried over indefinitely. For instance, advisers say several of their clients are still utilising losses made during the dotcom bust in the early 2000s to reduce their current tax bill. Limiting the period a loss could be carried over would both simplify HMRC’s administrative burden and would likely increase the tax take.
Certain assets are also notably free of CGT. For example, winnings from gambling (including lottery wins), vintage wine and classic cars. The latter two are what is known in tax circles as “wasting chattels”. These are items with a limited lifespan that typically lose their value over time.
“The OTS could well make the case to remove these exemptions from the CGT law and simply state that any asset sold for a capital gain should be subject to taxation,” Mr Shah says.
When could changes take place?
No changes are likely to take place before the Autumn budget. Normally the Treasury would give taxpayers time between announcing a policy and bringing it into force, typically to the start of the next tax year.
However, Ms Keller cautions: “We are in unprecedented times. At the moment anything is possible.”
Armando Rosselli, head of wealth advisory & UK resident non-domiciled clients at Standard Chartered Private Bank, says the government will be carefully assessing how well the economy is doing before deciding whether to introduce tax changes. “There is a political element too,” he adds.
Should people change their plans now?
Tim Stovold, partner at Moore Kingston Smith, says some of his clients have already said they plan to leave the country in anticipation of the possible CGT changes. However, generally advisers warn against making decisions to avoid a tax change that has not been confirmed — even when the direction of travel suggests increases are likely.
“You can’t do things just because you have a hunch,” says Ms Keller. “As soon as you’ve crystallised gains [or losses] you’ve pushed yourself into a corner.”
Instead, people should use the OTS review as an opportunity to think carefully about their affairs and seek professional advice if needed. If they had already planned to sell an asset, they could consider bringing forward their plans, suggests Charles Calkin, partner at James Hambro & Partners.
Kay Ingram, chartered financial planner at LEBC, also recommends people use up their current tax year allowances and make sure their spouse does too — as doing so doubles the tax break. “For those with capital gains and unused tax allowances the message is use it or lose it,” she says.
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