Capital Gains Tax review – Time for a tax rethink?

Following the recent review of capital gains tax (CGT) commissioned by Rishi Sunak it seems likely, although not inevitable, that we are going to see some form of tax hike in this space.

The Office of Tax Simplifications (OTS) review has some very clear findings that may prompt many investors to consider their capital gains position more closely.

The OTS report runs to some 131 pages but the key themes are as follows:

• The current £12,300 CGT annual exemption is considered to be too high and is likely to be reduced or abolished altogether
• CGT rates are likely to be brought in line with income tax. Currently CGT is charged at 10% for basic rate tax payers and 20% for higher and additional rate taxpayers. The rate rises for residential property gains to 18% and 28% respectively
• The automatic uplift on death is set to be removed, which is a big structural change for many. Currently assets are transferred to beneficiaries at the value on death rather than the time of purchase, which can result in very large CGT savings
• The generous Entrepreneurs Relief rules will be reviewed. Currently a rate of 10% CGT on qualifying assets prevails.

As ever the devil will be in the detail and the Chancellor will be under pressure to take action to recoup the debt pile that has reached unparalleled levels throughout 2020. Caution must be taken to ensure business owners, landlords and investors are not seen to bear the full brunt of any tax reforms. However, noises from the Treasury would seem to suggest that where in the past such reforms were seen as unpalatable and unnecessary, the need to rebalance the books has to take priority.

A simple reduction of the annual exemption to £5,000 could result in a doubling of the numbers of people paying CGT – too good to pass up? In the context of history we must also accept that we have had a good run. Between 1980 and 2008 CGT and income tax rates were aligned, but for many this will represent a doubling of their tax liability.

What to do? The simple answer will be to take advice and make a conscious decision to take action. For many it will be a good time to refresh and rethink. Taking gains now may be more palatable for many at the current historic low rates. The investment strategy need not change, but perhaps the underlying approach can be altered.

Moving away from directly held investments into fund strategies may be a consideration, where portfolio rebalancing does not trigger gains and would only be subject to CGT on eventual sale.

In addition, it is likely to be a good opportunity to reconsider the wider position in the context of Inheritance Tax and wider estate planning, particularly where business assets are involved.

It feels different this time around and that usually means something will change!

Get in touch if you have any questions about your CGT position.

Tax rules are subject to change and taxation will vary depending on individual circumstances. This article does not constitute advice or a recommendation; please consult a financial adviser.