Many more people may have to pay Capital Gains Tax (CGT) if the recommendations of a Government-ordered report are adopted.
A report by the Office of Tax Simplification, commissioned by the Chancellor Rishi Sunak, has proposed bringing the rate at which CGT is paid into line with income tax and scrapping the uplift on death in order to help plug the gap in the public finances left by the pandemic.
What Is Capital Gains Tax and When Was it Introduced?
Capital Gains Tax is broadly a tax on the gain realised on the difference between the purchase price of an asset and its value on sale. It was introduced by the then Prime Minister James Callaghan in 1965, at a rate of 30% to stop people avoiding income tax by changing income into capital.
What Is the Current Position?
At the moment, CGT is charged at four rates. The rate is 10% for basic rate taxpayers on gains except those on the sale of residential property where the rate is 18%. The rates for higher rate taxpayers are 20% and 28% respectively. Individuals have a personal allowance of £12,300 a year, meaning that no capital gains tax is payable on gains of less than this amount. Trustees have half the personal allowance, so currently £6,150.
The main exemption is the Principal Private Residence relief on the sale of your main home. The value of assets is also rebased on death, so that beneficiaries inherit assets at their market value at the date of death, rather than the value at the date on which they were acquired by the deceased.
The amount of tax raised through CGT in the 2017/18 tax year was £8.3 billon. The tax was paid by 265,000 people, and the average liability was £32,000. This is dwarfed by the amount raised through income tax, which is £180 billion a year from 32 million people, each paying on average £5,800.
What Changes Are Proposed?
- reducing the personal allowance
- raising rates to align with income tax rates
- abolishing the CGT uplift on death
What Would be the Effect of these Proposals?
- The OTS estimates that reducing the personal allowance to £5,000 would mean that twice as many people would pay the tax. This assumes no change in behaviour, which is unlikely, as many individuals arrange their affairs so as to realise gains of just under the personal allowance each year.
- Aligning the rates with income tax would be a way of dis-incentivising individuals and business owners from arranging their affairs, so that income is effectively re-characterised as capital gains - for example by holding cash within a business, rather than paying it out. It would also mean that offering share based remuneration would become less attractive.
- At present, when someone dies there is a rebasing of the value of their assets so that no CGT is payable on death. The OTS recommends a 'no gain no loss' approach where the recipient is treated as acquiring the assets at the historic base cost of the person who has died. It also recommends an extension of the availability of holdover relief so that CGT is only paid when an asset is sold, and not when it is gifted.
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