Chancellor Rishi Sunak has written to the Office for Tax Simplification, calling for a review of capital gains tax (CGT). What might the Chancellor do — and how can investors limit their exposure to the tax if it rises as sharply as many expect?
It is almost inevitable that taxes will have to rise to help meet the potential £391 billion bill the government has racked up in supporting the British economy through the Covid pandemic.
So the news that the Chancellor has his eyes on CGT should not come as a surprise. Many experts have been predicting for some time that this tax was vulnerable to change. The Labour Party and the Liberal Democrats both went into the last election promising reforms.
As Alistair Darling pointed out recently to Times Radio listeners: "The only truly popular tax is one people think someone else is paying.” With just 276,000 people billed for CGT in 2018/19, this may come as close as any tax to fitting that description — and so be ripe for raising.
It could also generate some attractive extra revenue. Those 276,000 people paid £9.5 billion.
Broadly speaking, if you dispose of something deemed a 'chargeable asset' — personal possessions worth £6,000 or more (apart from your car and your main or recent home) — you are likely to trigger a CGT liability.
You only pay on total gains above your annual tax-free allowance (£12,300 in 2020/21). Higher-rate or additional-rate taxpayers pay 28% on gains from residential property and 20% on gains from other chargeable assets. Basic-rate taxpayers pay 18% on residential property and 10% on other gains — if the amount is within the basic income tax band. Gains above this band are taxed at 28% and 20%.
From this you might see why the Office for Tax Simplification has been called upon! CGT has always been fraught with complexity. In 1982, when inflation rose above 20%, the then Chancellor, Geoffrey Howe, had to introduce indexation to allow people to strip out the impact of inflation on gains. Gordon Brown replaced this with a model that tapered the rate of taxation depending on how long you had held the asset (something Alistair Darling scrapped).
“ George Osborne changed CGT rates mid-year in 2010, so there is a precedent for an increase being applied before 6 April 2021... Consider acting promptly.”
Hopefully the new system will be simple, though it is also likely to be more costly for taxpayers. In the past CGT has been aligned with income tax. Many suspect this is what will happen now, meaning that the cost of disposal could be more than double for additional-rate taxpayers sitting on assets pregnant with gains.
This is a sensible time for such investors to review their investment portfolios. Rathbones Senior Financial Planner Stuart Grennan says: “Many clients have assets they hold outside their Rathbones portfolios, like shares they have inherited or bought with the proceeds of company Sharesave schemes. Ask whether these could be more appropriately invested today, and if the answer is positive then now may be a good time to talk to your adviser about disposal.”
Chancellors normally introduce significant changes at the turn of a tax year, but George Osborne changed CGT rates mid-year in 2010, so there is a precedent for an increase being applied before 6 April 2021. If this is an issue that affects you then you may be well advised to act promptly.
There are a number of options you can take to reduce CGT.
1. Share your assets with your spouse/civil partner before disposal
You can transfer your assets into joint names if you are married or in a civil partnership without triggering a tax event. This allows you effectively to double up on your £12,300 (2020/21 tax year) allowance, permitting you £24,600 in CGT-free gains in one year. Note that the transfer to your spouse or partner must be a genuine outright gift and transferring gifts to other family members will trigger the tax.
“ Capital gains tax generated £9.5 billion for HMRC in 2018/19.”
2. Capitalise on your losses
If you have losses on some of your chargeable assets you can crystallise these through disposal and offset them against any gains. In essence, you are resetting the clock on both losses and gains. You can carry forward unreported losses from up to four previous years. There is a strange additional carry-forward benefit. You can still also claim for losses made before 5 April 1996 but must deduct these after any more recent losses.
3. Donate chargeable assets to charity
You do not pay tax on land, property or shares you donate to charity. The charity can make the disposal and is exempt from CGT. Such donations are not eligible for Gift Aid, but you can deduct the value of your donation (the amount the charity receives on disposal) from your total taxable income to reduce your income tax bill. So you can benefit in two ways from such a gift. If you were planning to make a sizeable donation to charity anyway then you may want to consider using this route instead.
4. Staggered disposal
If possible, consider disposing of chargeable assets over a number of years in stages, crystallising gains within your annual tax-free allowance.
Assets held within a pension or ISA are free of CGT. Generally, you cannot take an asset you already own, move it into an ISA or pension and then dispose of it — the transfer is deemed by HMRC to trigger a CGT event.
It clearly pays to have as much of your assets held within ISAs and pensions as possible. Talk to your adviser to discuss how to optimise these tax-efficient benefits. If you hold a considerable amount of chargeable assets and are no longer using all your available allowances then you may want to consider staggering disposal of assets and moving the proceeds into a pension or ISA.
We encourage you to speak to your financial adviser before making any major decisions. Tax treatment depends on the individual circumstances of each client and is always subject to change. This is a complex area and it is no means certain that any changes will increase the costs of CGT to you, but it is well worth considering what prudent action you might take ahead of the forthcoming budget. Good advice could save you money.