Speculation around potential changes to Capital Gains Tax rates has been rife for some time now, with many experts predicting a rates rise in the forthcoming budget.
Many had hoped these changes would be cancelled given the latest lockdown measures and the current financial landscape, however it seems the best that can be hoped for is a deferment. It now seems likely these changes will in fact take place, its now just a matter of when.
A recently conducted review by the Office of Tax Simplification made a number of recommendations to the Government and these recommendations are expected to form the framework of any changes going forward.
Lets look at the current Capital Gains Tax rates and the existing measures:
- 10% Capital Gains Tax charged to basic rate taxpayers
- 20% to higher/additional rate taxpayers
- 28% rate on residential properties other than main residencies (which are currently exempt from Capital Gains Tax)
For context, this is against the backdrop of the main income tax rates of 20% for basic rate tax payers and 40-45% for higher rate tax payers.
Capital Gains Tax is usually payable on the sale of businesses or shareholdings, property and investment portfolios.
Its this gap between Income Tax Rates and Capital Gains Tax that has been the subject of much discussion. The fact that Capital Gains Tax typically affects the wealthier sections of society has led to much debate over potential rate rises.
The Office of Tax Simplification’s report made a number of recommendations based on their review and we’ve looked at those recommendations below:
- Should the Government prioritise the prevention of converting income into capital, it could reduce the gap between Income Tax and CGT rates or address the boundary rules between the two
- In the event that the Government considers closer alignment of Income Tax and CGT rates, it should also consider the reintroduction of relief for inflationary gains (i.e. indexation allowance), how that works in relation to corporation tax and more flexibility in terms of the execution of capital losses (for example relief against income)
- Should the disparity between Income Tax and Capital Gains Tax rates remain and the Government chooses to focus solely on CGT, a reduction on the number of CGT rates and the extent to which they depend on the level of a tax payers income could be considered
- If boundary issues relating to Income Tax and CGT rates should consider whether owner managers and employees rewards from personal labour (distinct from capital investment) are treated consistently. Furthermore, employment related share based rewards and the accumulated retained earnings in smaller companies should be taken into consideration for taxing at Income Tax Rates.
It’s important to remember here that these are recommendations and none of these proposals have yet been implemented as enforceable. So what could they actually mean for businesses and what are the specific areas of interest?
- Business Sales – Having already taken time to adjust to the notion that the ‘gain’ will be taxed at 20% outside of the first £1m, there will be a further adjustment period for the market to be comfortable with higher rates. It will take time to settle.
- Incentive shares for employees – If the recommendations are enforced, growth shares may lose some of their advantages
- Private Equity – The Capital Gains Tax rate for Private Equity Fund managers sits at a higher rate currently, any subsequent increase in rates will affect the realisation of carried interests
In summary, the rationale behind the Government asking the Office of Tax Simplifications to conduct a review on the existing CGT rates was to gauge public and political reaction to raising more money through Capital Gains Tax. The general consensus seems to be that moderate increases may well be accepted but any significant overhaul would be less than welcome.
As always, good luck with everything, stay safe and if we can help in any way we’re happy to do so.
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*Sources: Gov.uk, OTS