Originally published by Brewin Dolphin, an investment partner of Wren Sterling
Investors, entrepreneurs, and property owners are being urged to review their finances after Rishi Sunak, the Chancellor, announced a surprise review into capital gains tax.
Sunak has borrowed unprecedented amounts of money to fund the various coronavirus relief packages during the pandemic. Now, as he winds down the support programmes, he is looking at ways in which the mountain of Covid-related debt might be repaid.
The conservative party manifesto explicitly ruled out rises in income tax, national insurance, and VAT, so the Chancellor doesn’t have many other options.
Most capital gains tax is collected from the sale of assets such as shares, second homes or buy-to-let properties, although it also extends to works of art and the sale of businesses and business property. The government has said CGT will raise about £9.1bn in the 2019/20 tax year, only equivalent to around 1% of the entire tax take. But that could easily rise.
How is CGT levied?
CGT has more favourable rates and thresholds than income tax – for basic-rate taxpayers, the CGT levy is 18% on second homes and buy to lets, and 10% on other assets. If you are a higher-rate taxpayer, the rates are 28% and 20% respectively. There is also the CGT allowance of £12,300 in the current tax year, meaning you can make that amount in gains without paying any CGT at all. Additionally, private property is not subject to CGT, so anybody selling their main residence will not incur any liability. All this means is that few average earners pay any CGT at all.
Why are CGT rates so low?
Low capital gains tax is thought to encourage risk taking by incentivising investment into the stock market, which helps provide companies with capital. And it can encourage entrepreneurs to invest and expand their businesses to build more valuable ventures that employ more people.
However, those arguing for reform point to a report published in May by the Resolution Foundation, a think tank, that found that half of all taxable capital gains are now related to people’s jobs, usually in the form of performance bonuses such as share options.
It is argued that the lenient CGT regime may have encouraged employers to structure remuneration in a way that avoids income tax, and therefore needs to be updated.
What changes could be made?
One obvious option would be to tax the sale of private homes, which would have raised £26.5bn in 2019/20, according to estimates by the Treasury. But this would be hugely unpopular, especially among those that plan to use their property to help fund their retirement or fund care in old age. It is unlikely the government will go this far.
However, it is entirely feasible that the CGT levied on buy-to-let properties and second homes could be raised in line with income tax rates, at 20%, 40% and 45%.
Or Sunak could simply move all of the CGT rates in line with income tax rates, regardless of the type of asset, raising the maximum chargeable rate from 28% to 45% at a stroke. He could also reduce or abolish the annual CGT allowance, currently £12,300, and then expand the range of assets that are the tax is applied to. This could mean changing the level of CGT paid on a range of business assets and stakes held in small businesses by major investors. Any shareholder stake of over 5% could be caught by changes to this rule, known as Business Asset Disposal Relief.
What can you do to prepare?
With CGT in the firing line, it would make sense to use existing allowances while you still can – but only after speaking to your financial adviser!
There will be different options depending on individual circumstances, but immediate options include:
- Max out your ISA and pension allowances for the current tax year because gains made in these vehicles are free from CGT.
- Crystalise gains by selling shares or assets, then set those gains against the annual allowance.
- Bed and ISA – this refers to the practice of selling assets outside an ISA then reinvesting them inside the tax-efficient wrapper.
- Crystallise gains over the CGT allowance now to use the existing 10% or 18% levy as these rates are more favourable than existing income tax rates of 20%, 40% or 45%.
CGT is a complex area and it affects many more aspects of your life than you might think, from your business to your savings and investments. There is no ‘one-size fits all’ solution to making your financial affairs as efficient as possible from a CGT perspective, but it is important to consider the options that are available now so that you can safeguard your financial future. If you have any concerns about your financial affairs and the impact of CGT, please speak to your adviser to arrange a conversation.
The value of investments can fall and you may get back less than you invested. Please note that this document was prepared as a general guide only and does not constitute tax or legal advice. While we believe it to be correct at the time of writing, Brewin Dolphin is not a tax adviser and tax law is subject to frequent change. Tax treatment depends on your individual circumstances; therefore you should not rely on this information without seeking professional advice from a qualified tax adviser.
Refer to Tax Thresholds in Wales and Scotland, as appropriate. Past performance is not a guide to future performance.
The information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.
The opinions expressed in this publication are not necessarily the views held throughout Brewin Dolphin Ltd. This information is for illustrative purposes only and is not intended as investment advice. No investment is suitable in all cases and if you have any doubts as to an investment’s suitability then you should contact us