Rishi Sunak has written to the Office of Tax Simplification (OTS) requesting a review of the Capital Gains Tax (CGT) regime. He asks the OTS to determine whether the rules are ‘fit for purpose’ and whether they could be simplified. He also asks them to address ‘areas where the present rules can distort behaviour or do not meet their policy intent’. Crucially, he also says: ‘In particular, I would be interested in any proposals from the OTS on the regime of allowances, exemptions, reliefs and the treatment of losses within CGT, and the interactions of how gains are taxed compared to other types of income’ – which allows a wide scope for this review.
Current impact of the CGT regime
• CGT currently takes in only 1.1% of total tax revenue (coming in at an estimated £9.1bn in 19/20)
• Those who pay CGT are twice as likely to be higher rate taxpayers.
• There is currently an annual exempt amount for every tax payer of £12,300 for the tax year to 5 April 2021.
• There are generous reliefs in place for:
– Private residences
– Chattels – like vintage cars, art, wine
– Lottery winnings
Potential targets of this Regime change
1. Principal Private Residence Relief (PPR)
This is, without a doubt, the most generous relief available in the regime. If scrapped, the Treasury estimates that it could raise CGT revenues by £26.5bn per year. A move to scrap this relief would be met with considerable opposition however, and it would also run counter to the government’s efforts to get the property market moving.
Labour’s campaign manifesto of 2019 notably supported the continuance of this relief. The Institute for Public Policy Research (IPPR) also recommends its continuance. It would be surprising to see this scrapped under a Conservative government.
2. Annual Exempt Amount of £12,300
Both Labour and the IPPR appear to be in favour of reducing the current annual exempt amount to £1,000 per person per year. Given this standard limit of £1,000 has recently been introduced for trading income and property income this looks like an easy option to raise revenue.
3. The Capital Gains Tax uplift on death
Death has never previously been a taxable event for CGT. The inherent gains on assets that you hold die with you, never crystallising. Where the estate is considerable there is clearly going to be inheritance tax to pay at the point of death, but when only roughly 5% of estates pay inheritance tax it is evident that there is a significant untapped well of potential tax revenue here. This is likely to be considered by the government alongside the inheritance tax review recently requested of the OTS and looks a likely target for change.
4. One single flat rate?
Strictly speaking the OTS are supposed to provide solutions for simplifying tax, rather than provide tax policy. It seems natural that they might make the suggestion to streamline the CGT rates. Currently there are 5 different tax rates for different types of disposals – with rates of between 10 and 28%. This would be an easy option but seems unlikely to give the exchequer the best return.
5. Aligning the CGT rates with income tax
This was proposed by Labour in their 2019 manifesto. It was also proposed by the IPPR, who suggested that the change could bring about increased annual revenue of £90bn. It could be that this type of alignment is brought in specifically to address certain target transactions, for instance sale of second homes and buy-to-let properties – the investment in which has been under continued attack by the exchequer in recent years.
6. Bringing Chattels and Winnings into tax
It is possible that reliefs for chattels like vintage wine, art and vintage vehicles could be brought within the normal capital gains tax rules. Would it be considered that behaviours have been distorted so that people can make money on these types of investments in order to escape tax? It seems a little unlikely considering the prevalence (or lack thereof) of this type of investment activity, and the likely impact this would have on the exchequer. Lottery and gambling winnings however could be a lucrative target.
7. A wealth tax?
Under a conservative government? Possible perhaps. It might indeed fall in line with the Government’s thus far woolly proposals for ‘levelling up’.
Such taxes introduced in France, Spain, Germany and other European countries typically bring in less than 1% of tax revenue.
It’s worthwhile taking into account that the Conservative Manifesto pledged not to raise Income Tax, National Insurance or VAT. This leaves Mr Sunak few options for filling his coffers.
The government has begun a consultation process, in which we are participating, that ends on 12 October 2020 and the results should then be available to Mr Sunak before the Autumn Budget which is expected in October. Given the gaping hole in public finances it is likely that changes could be affected from the date of the budget.
If you feel the need to consider your own capital gains tax position in anticipation of changes then please get in touch with us and we can help you to review your options.