Will the proposed changes to the
Capital Gains Tax affect you?
Capital Gains Tax
The Office of Tax Simplification (OTS) is the independent adviser to government on simplifying the tax system.
The work of the OTS is rooted in improving the experience of all who interact with the tax system. The OTS aims to improve the administrative processes, which is what people actually encounter in practice, as well as simplifying the rules. These are often of equal importance to taxpayers and HM Revenue & Customs (HMRC). In July 2020, the Chancellor asked the OTS to carry out a review of Capital Gains Tax (see Annex A), to ‘identify opportunities relating to administrative and technical issues as well as areas where the present rules can distort behaviour or do not meet their policy intent.’So…What is Capital Gains?
Capital Gains Tax is tax on the difference between an asset’s value when acquired and its value at disposal, less any allowable expenses. The main exemption is a relief for a taxpayer’s main or only home. Assets can be acquired in various ways including through purchase, inheritance or as a gift, and are generally disposed of either through selling or gifting. Those paying Capital Gains Tax can be categorised as below:
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Annex A
In the report the OTS raised significant issues around the below::
The main recommendations made by the OTS to the government are set out below:
1) Rates
Consider raising Capital Gains Tax rates to align with Income Tax rates.. What would this mean to you? If you were a 40% income tax payer, and you made a gain of £100,000 your capital gains tax liability would be £20,000. If the government acted on this recommendation then the capital gain tax liability would increase to £40,000 (ignoring annual exemption).2) The Annual Exempt Amount .
If the government’s policy is that the Annual Exempt Amount is intended mainly to operate as an administrative de minimis, it should consider reducing its level. Currently each taxpayer gets an annual exempt allowance of £12,300 (2019/20), this means that you only pay Capital Gains Tax on any gains over £12,3003) Capital Transfers
The government should consider removing the capital gains uplift on death. What does this mean? Currently, when an individual inherits assets, this is done at market value which provides an uplift for capital gains tax to the recipient. Here the OTS recommend that is removed and the recipient is treated as acquiring the asset at the price that the person who had died paid for the asset. For example, if you inherited a property worth £200k for your Dad, who bought the property for £100k, your base cost for CGT would be £200k. The OTS does go on to say if the above is acted on by the government then they should consider are basing of all assets, perhaps to the year 2000, and consider extending Gift Holdover Relief to a broader range of assets. Currently this excludes assets such as residential property.
4) Business Reliefs
The government should consider replacing Business Asset Disposal Relief (previously known as Entrepreneurs Relief) with a relief more focused on retirement. Currently if you have owned shares (more than 5%) for at least two years in a trading company and you sell them you qualify for Business Asset Disposal Relief, which means any gain on the sale up to £1m is taxed at 10%. What would the above recommendation mean for you? If you was selling shares in a trading business at a younger age (not retirement), then potentially any gain would be tax at the appropriate capital gains tax rate, which should be either 10% or 20%.5) The government should abolish Investors’ Relief.
Investors’ Relief reduces the rate of capital gains tax (CGT) charged on disposals of qualifying shares to 10%, subject to a £10 million lifetime limit. The maximum potential tax saving under Investors’ Relief is therefore £1 million. The relief is available to both individuals and trustees where certain conditions are met. - The qualifying shares must be new unquoted ordinary shares acquired by subscription and were issued on or after 17 March 2016. - The new ordinary shares must be subscribed by the investor wholly in cash and must be fully paid up at the time of issue. - There are anti-avoidance rules which state that the shares must be subscribed for and issued by way of a bargain, at arm’s length, for genuine commercial reasons and not as part of an arrangement where one of the main purposes is to secure a tax advantage to any person. - The company must be a trading company or holding company of a trading group throughout the ownership period (there is an 80% test to measure the company’s trading activities compared to its non-trading activities).
- The investor, or a person connected to the investor, cannot be an officer (e.g. director or company secretary), an employee of the company or a connected company, at any time in the ownership period (except in very limited circumstances for certain unremunerated directors and investors, where there was no reasonable prospect that they would become an employee at the time they subscribed for their shares but subsequently do become an employee or officer).
- The ordinary shares must be held by the investor continuously from subscription to disposal and the ownership period must be at least three years from 6 April 2016. For shares issued after 17 March 2016 but before 6 April 2016 the relevant holding period is extended to three years from 6 April 2016, therefore the earliest time Investors’ Relief will be available for disposals will be on or after 6 April 2019.
- Investors’ Relief will not be available if the investor (or an associate of the investor) receives value, other than insignificant value, from the company (or a person connected with the company) at any time in the period beginning one year before the date the shares were issued and ending immediately before the third anniversary of the issue date. The rules are wide-ranging and so any amounts intended to be paid by the company to the investor should be carefully checked to ensure that they do not fall within these values received rules.
Conclusion
The OTS recommendations, if implemented, could result in increases in tax on capital gains. Whilst the government have ordered the review and there has been a lot of press coverage, it is important to keep this OTS report in context and bear in the mind the government may choose not to act on any of the recommendations. However, if you think you may be impacted by potential changes of this nature, now is a good time to review your position so that should the government decide to make any changes you understand the implication. If you have any queries, please do not hesitate to contact me or the team.