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A review of capital gains tax commissioned by chancellor Rishi Sunak this week proposed big reforms to the levy, including raising CGT rates to similar levels as income tax rates and cutting the annual allowance.

If adopted, the recommendations by the Office of Tax Simplification (OTS), a statutory body, would have a significant impact on some investors, company directors and buy-to-let property owners when realising gains. It comes as the government faces a daunting task in restoring public finances after the pandemic.

Above an annual exemption of £12,300, CGT is charged on gains at 10 per cent for basic rate taxpayers and 20 per cent for higher and additional rate taxpayers. This rises to 18 per cent and 28 per cent respectively where the gains relate to residential property. Income tax is charged at a basic rate of 20 per cent, rising to 40 per cent and 45 per cent for higher and additional taxpayers.

What did the report say?
The OTS found several areas in which CGT was “counter-intuitive, creates odd incentives, or creates opportunities for tax avoidance”. It pointed to employee share schemes and company directors, who are able to recategorise earnings from their work as capital gains and pay tax at lower rates.

Aligning income tax and CGT rates would reduce these distortions, the OTS said, as would charging income tax rates on business owner-managers and share remuneration. The government should also consider bringing in inflationary relief on gains, it said.

Describing the current CGT allowance as “relatively high”, the OTS floated a cut to between £2,000 and £4,000. It also urged a reduction in the number of different rates that CGT is charged at from four to two, to make the system simpler and more predictable.

On transferring wealth, it recommended scrapping the “capital gains uplift” rule, which allows beneficiaries to inherit an asset at its value on the date of death rather than the time of purchase. This encourages people to transfer business and personal assets on death, rather than during their lifetime, the OTS said. “This may not be best for the business, the individuals or families involved, or the wider economy.”

If the uplift were abolished, the date automatically used to value assets that have been held for a long time — such as family farms or property — should be moved up from March 31 1982 to the late 1990s or year 2000, it added.

What do the experts think about it?
Several tax experts attacked the review’s potentially negative impact for business owners, investors and landlords. Nimesh Shah, chief executive of accountancy firm Blick Rothenberg, described the proposals as “dangerous” and “a far cry from simplification”.

Graham Boar, partner at accountancy firm UHY Hacker Young, said the recommendations would upend the tax system and would be seen as “an attack on business”.

The proposed alignment of CGT and income tax rates, with some inflationary relief, would put business owners at a disadvantage to property investors, as inflation is likely to form a larger part of a property’s increase in value over time, said Tim Stovold, head of tax at accountancy firm Moore Kingston Smith. “[It’s a] nightmarish read for business owners.”

The OTS estimated that reducing the annual exemption to £5,000, for example, would double the numbers paying CGT. This was a worry for the Association of Taxation Technicians, a professional body, which said the allowance should not be cut without other mitigating measures.

Meanwhile there was consternation about the knock-on effects the changes might have on the housing market. David Alexander, co-chief executive of Apropos, a property platform, said increases in CGT would “stifle growth, discourage investment, and depress the housing market” as landlords rushed to sell ahead of any planned change.

The amounts landlords and second-home property owners would pay would also increase from a drop in the exemption threshold. Aneisha Beveridge, research director at estate agent Hamptons International, calculated that if the annual exemption was reduced from £12,300 to £5,000, the tax bill for a higher rate-paying landlord selling for the average gross gain of £69,000 this year would rise from £15,880 to £25,600, a 61 per cent increase.

Those inheriting assets would also lose from the scrapping of the CGT uplift, Mr Stovold added. “If this change should become law, capital gains could accrue across multiple generations making assets unsaleable due to the astronomical tax liability — a liability that could come home to roost if they were ever sold,” he said.

However others welcomed the report’s suggestions, with some saying it offered effective solutions for improving the current rules.

Robert Palmer, executive director at campaign group Tax Justice UK, said: “A hedge fund manager earning millions from their wealth should pay higher tax rates than a nurse. But the current rules means some people earning millions can get away with rates as low as 10 per cent.”

Carys Roberts, executive director of IPPR, a think-tank, said: “The proposal to more closely align rates of tax on income from work and capital gains would be fairer, simpler and raise revenue for the Exchequer.”

How likely are the changes to come into force?
The Treasury said it would consider the report in “due course”. Some people close to Mr Sunak have indicated that the government was unlikely to embrace the reforms, pointing to the lack of support for the OTS’s previous recommendations on inheritance tax. However tax experts said the scale of public spending in the pandemic suggested change was on the horizon.

Rebecca Fisher, a partner at law firm Russell-Cooke, said that the Treasury was likely to consider the recommendations a “no-brainer”.

But Laith Khalaf, financial analyst at investment platform AJ Bell, said they would still be a big departure for a Conservative government. In these extraordinary times, however, the government had been willing to do “all sorts of things” that were incompatible with traditional Tory values of fiscal caution and light touch government, he added.

What should people do?
Tax-wrapped pensions and individual savings accounts (Isas) are safe from CGT, so advisers urge savers to use up any unused allowances available.

Myron Jobson, personal finance campaigner at Interactive Investor, said some people might benefit from a “bed and Isa” transfer on any shares held outside a wrapper. This involves selling the investments up to the annual tax-free CGT exemption and buying them up to the same value in a single transaction. However, investors doing this would incur trading costs.

Finance experts said entrepreneurs and landlords, whose gains from business or property sales may be liable to CGT, would increasingly divest in the near future to avoid potentially higher taxes.

Mark Heppell, corporate partner at JMW Solicitors, said he also expected an increase in businesses becoming employee-owned. “It’s a tax efficient exit strategy and the swift process will continue to be very attractive given the impending changes,” he added.

But generally, planners suggest people think carefully and take financial advice before making big decisions — especially as the government has not announced any changes.

Rachael Griffin, tax and financial planning expert at Quilter, said: “[While] it is not suitable for everyone to change their financial plans because of mere policy speculation, it is worth your while to review in light of what will inevitably be a more harsh tax environment.”

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