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November 10th 2020

Capital Gains Tax - reform on the horizon?

In July 2020, the Chancellor commissioned the Office of Tax Simplification (OTS) to review the CGT regime. The first report was released earlier this month, the highlight of which is a recommendation to increase the tax rate and reduce the annual exempt amount on gains.

CGT - a quick refresher

CGT is a tax on individuals (and trusts) who make gains on the disposal of assets. Second homes, commercial properties and shares in companies are common examples of assets which are often subject to CGT, although an individual's main home is normally excluded.

The gain you make is usually the difference between how much you sold the asset for and what it cost originally (less subsequent 'enhancement' expenditure). You don’t have to pay any tax on the first £12,300 of gains in the current tax year, as that is covered by the annual exempt amount.

The rate of tax you pay depends on what you sell and whether the gain falls within your income tax basic rate band or not:

Asset

CGT basic rate

CGT higher rate

Residential property

18%

28%

Other assets

10%

20%

What is changing?

At the moment, nothing. However the report recommends that the CGT rate should be aligned with income tax and that the annual exempt amount should be reduced or removed altogether!

The Chancellor will consider the report before making any changes, which would likely be announced in the Spring Budget 2021. The government will need to raise taxes to help fund the huge deficit, and CGT is widely considered to be something of a 'soft target'.

Example

To illustrate the potential financial impact, lets consider an example where a married couple - let's call them John and Susan - sells a commercial property they jointly own, and assuming the tax will be charged at the basic rate.

They purchased the property for £150,000 and spent £50,000 building an extension and are now considering selling the property for £250,000 (so they have a gain of £50,000, or £25,000 each). I have assumed that the annual exemption will be reduced to £4,000 and the CGT rate aligned with income tax rates.

Possible CGT scenario
CurrentlyPotentially?
Chargeable gain50,00050,000
less Annual Exemption-24,600-8,000
Taxable gain (in total, 2 people)25,40042,000
Tax rate10%20%
CGT payable2,5408,400

Should the Chancellor decide to make changes based on the recommendations, in this scenario John and Susan could end up paying significantly more tax, an extra £5,860 between the two of them.

What should I do?

We can’t say with any certainty what will happen to the CGT regime, however it seems likely that this will be one of the areas the government will look at to increase tax revenue. If you are considering selling an asset in the near future at a gain, you should bear this in mind when deciding whether to sell and when. In some cases it may be worthwhile bringing forward planned disposals into the current tax year; although this may accelerate the tax payment due date, it may ultimately result in a lower tax cost.

Readers considering any action (or inaction) as a result of this blog must take appropriate professional advice specific to their circumstances. Contact us today for assistance.

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