Following the significant increase in public expenditure as a result of the Coronavirus pandemic, speculation has been mounting as to which taxes the Chancellor, Rishi Sunak, is likely to increase in order to pay for this.
One area many financial commentators have suggested is ripe for an increase in prevailing tax rates is the tax levied on capital gains. At present, capital gains tax is relatively low in comparison to other taxes, at just 20% for higher and additional rate income tax payers on certain gains. For basic rate taxpayers, the rate payable depends on that individual’s taxable income and the size of the gain, and is often only 10%. A further 8% is charged on gains deriving from a disposal of residential property.
The Chancellor has recently asked the Office for Tax Simplification (OTS) to review capital gains tax. Some commentators have speculated that the OTS may recommend tax on capital gains is charged at the same rate as on a person’s income. This would have significant ramifications in terms of how much tax is paid by individuals when gains are crystallised, potentially increasing tax rates by a further 25% for additional rate taxpayers and 20% for higher rate tax payers.
There is also speculation that there may be changes to the relief on gains following the disposal of a person’s main home. This relief, known as principal private residence relief, allows individuals selling their home to, in the vast majority of cases, avoid paying capital gains tax altogether. Again, this could have huge implications for those looking to upsize or those planning to downsize and release some equity from their homes as a provision for retirement.
The Chancellor has also asked the OTS to consider how small businesses pay capital gains tax. At present, the rate of tax on capital gains for businesses (at the same rates of corporation tax) is significantly lower than that paid by individuals. This is particularly the case for gains made by way of residential property – taxed at a rate of 19% as opposed to a maximum potential rate of 28% for private individuals.
These announcements have naturally caused some anxiety and uncertainty among, predominantly, high net worth individuals, with many now considering crystallising any gains sooner rather than later. If the Chancellor does look to make significant changes in this area, these will likely be announced at the Autumn Budget. What is not clear is whether the Chancellor will give any warning of such changes – which would allow investors to cash in gains at the lower rates of tax, ahead of any tax hike – or if any changes may be introduced with immediate effect. People who are considering making gifts to individuals or settling assets into trust would be well advised to take action sooner rather than later, while capital gains tax rates are more attractive than they may become in the relatively near future.
Should you wish to explore tax planning opportunities with a member of our team, please feel free to get in touch with your usual Shepherd and Wedderburn contact.