Recently, there has been much speculation about the future of capital taxes, including capital gains tax, inheritance tax and a possible wealth tax. Could there be potential changes in the offing that could affect the taxation landscape for decades? If so, now might be a good time to review your personal situation ahead of time.
The 2020 Budget
In this year’s Budget, Rishi Sunak side-stepped the issue of capital tax reform, focusing rather on measures to recover from the pandemic. However, the next Budget might provide the Chancellor with a good opportunity to announce some changes to help rebalance the UK’s finances.
When the next Budget might actually take place is still not clear. Industry commentators feel that the Chancellor might currently be considering pushing the budget into 2022 so the Treasury has time, over the next few months, to weigh up the impact of ending the furlough scheme and the continuing coronavirus pandemic .
Possible changes to Capital Taxes
In July 2020, the Office for Tax Simplification (OTS) carried out a review of the Capital Gains Tax system. Their recommendations covered three key areas: rates and boundaries, the annual exempt amount and capital transfers. If we look more closely at these recommendations, they give some valuable pointers to possible changes.
Align Capital Gains Tax rates with Income Tax rates
Aligning Capital Gains Tax rates with income tax rates is probably one of the most obvious places to start. Currently, the standard rate for Capital Gains Tax stands at 10%, with a higher rate of 20% (18% and 28% for residential property), whilst the basic income tax rate is 20% rising to 45% for additional rate taxpayers. Capital tax reform could introduce higher Capital Gains Tax rates over the next few years – or alternatively, the thresholds could be changed.
Reduce the Capital Gains Tax-free allowance
The Capital Gains Tax annual exemption is £12,300 for the year 2021/2022. The Chancellor could decide to reduce this allowance, with these changes being tapered over a number of years.
Reduce the current Capital Gains Tax uplift on inherited assets
The current “Capital Gains Tax Uplift” reduces the tax payable when an asset is inherited and then sold for a profit. For example, if an individual inherits a shareholding in a family business and then sells his share, the Capital Gains Tax would be based on the increase in value of the asset from when the asset was inherited it and to its value when it was sold.
If the “Capital Gains Tax Uplift” is removed, Capital Gains Tax would then be calculated on the difference between the historic base cost, i.e. the original price the deceased paid for the asset, and its current value. This change could have a significant impact on tax planning during an individual’s lifetime and the decision whether shares should be held onto or sold.
Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief)
The lifetime limit for the Business Asset Disposal relief was reduced from £10m to £1m in the 2020 Budget. This relief could be completely abolished or alternatively, the current 10% rate to be paid on gains on qualifying assets could be increased. The OTS recommend that the government should consider replacing Business Asset Disposal Relief with a relief more focused on retirement.
Capital Gains Tax on the sale of a business or land
The OTS recommend reform for business owners, so that Capital Gains Tax should be paid when the cash is received, whilst still preserving the business owner’s eligibility to existing reliefs. This should do much to prevent distorting commercial decision making.
This reform would be particularly important in complex sales situations when, for example, the sale proceeds might be paid over a number of years or the sale price might be a mixture of cash and other assets.
And what about a wealth tax?
Whilst many commentators feel that introducing a wealth tax is unlikely, the issue has been investigated by the Wealth Tax Commission and could be a possible way for the Chancellor to boost its coffers following the COVID-19 pandemic.
The Wealth Tax Commission’s December 2020 report outlines the benefits of a one-off wealth tax, which could raise, for example, a total of £260 billion if a rate of 5% for those with £500,000 is applied, whilst £80 billion could be generated if those with £2 million of assets are charged a rate of 5% rate. The Commission reports that this tax would target those with the greatest ability to pay, based on wealth, and would be difficult to avoid.
However, it is yet to be seen whether the government has the stomach to introduce a one-off wealth tax, without considerable reform of the other capital taxes.
Whilst no date has been set for the next Budget, possible capital tax changes could impact entrepreneurs, family businesses, those planning to exit their businesses, landlords and those with accumulated personal wealth. Please do get in touch with the DRG Tax Team if you wish to undertake a full review your affairs. We would be very pleased to hear from you.
For further information
DRG Fact Sheet: Capital Gains Tax
DRG Fact Sheet: An overview of Inheritance Tax
Gov.uk: Policy Paper: OTS: Capital Gains Tax Review – first report. Simplifying by design November 2020
Gov.uk: Policy paper: OTS Capital Gains Tax Review: Simplifying practical, technical and administrative issues May 2021
The Wealth Tax Commission Report 9th December 2020
DISCLAIMER: This information is for guidance only, and professional advice should be obtained before acting on any information contained herein. We will not accept any responsibility for loss to any person as a result of action taken or refrained from in consequence of the contents of this publication.
