COVID-19 has borne witness to increased public spending on an unprecedented scale. It has been estimated the UK is facing an annual bill of more than £300 billion to cover the cost of measures such as the furlough and self-employed support schemes. Earlier this year, Chancellor of the Exchequer Rishi Sunak requested a report from the Office for the Simplification of Tax (OTS) on Capital Gains Tax (CGT) and how it can be re-modelled to generate additional revenue for the country.
It is clear CGT has been identified as a key source of much-needed additional revenue and on a note of political expediency will impact fewer members of the population.
What is Capital Gains Tax?
CGT is one of two key UK wealth taxes, which seek to tax individuals (and companies) on the increase in value of their capital assets when they sell or give them away.
Broadly speaking, a capital gain is calculated as the difference between how much consideration you received on the sale of an item and how much you originally paid for it. The rules differ slightly when you give assets away. Gains are subject to the following tax rates:
|Basic Rate||Higher Rate|
|Shares, commercial property, investment portfolio||10%||20%|
This is in stark relief to Income Tax rates which are taxed at 20%, 40% or 45%, depending upon your marginal rate of tax.
Most UK individuals benefit from a portion of capital gains each year tax-free in the form of an Annual Exemption. The Annual Exemption for the current 2020/21 tax year is £12,300.
The most common assets which are subject to CGT are houses, land, shares paintings/antiques and businesses. Cars, racehorses and gambling receipts are specifically exempt from CGT.
FOUR Key Proposed Changes
- CGT rates are aligned with income tax rates.
This would mean for many individuals when they sell capital assets the rate of tax will effectively double.
2. Reduction of Annual Exemption
Currently, many capital gains transactions are outside the scope of tax as they are sheltered by an individual’s Annual Exemption which is £12,300.
Consequently, when a couple disposes of a joint asset they can generate gains of up to £24,600 within one tax year completely tax-free.
The OTS wishes to radically slash the Annual Exemption to £2,000 to ensure many more capital gains are brought within the charge for tax.
3. Abolition of CGT-free uplift at death
Under current rules, beneficiaries of deceased estates receive a revaluation which reflects the market value of an inherited asset at the date of death.
This is completely tax-free and means that if an individual sells an asset immediately after inheriting it, they can do so tax-free.
The OTS report suggests that this is unfair and inhibits individuals from transferring wealth when they are still alive. It recommends the base cost of the individual is transferred to beneficiaries at the date of death with no CGT-free uplift to present market value.
4. Removal of Business Asset Disposal Relief (formerly Entrepreneurs’ Relief)
BADR is available when business owners sell or give away a material part of a trading business and applies a beneficial rate of tax of 10%, regardless of the individual’s level of income.
Over a lifetime, entrepreneurs can sell their business and make total chargeable gains of up to £1 million and pay only 10% tax.
BADR has been under consistent scrutiny as many critics feel that tax breaks should be awarded at the outset of new businesses and not when they come to an end.
Although this is pure speculation, there are clear indications that CGT changes are imminent, therefore if you are selling a property, shares or your business the key is to receive tax advice as soon as possible.
There are a multitude of situations in which tax relief may apply but they include:
- Selling your business
- Selling your main home
- Gifting shares in your company to a family member
- Reinvesting proceeds of sales into your business
We always aim to minimise tax and maximise savings for you and your business. Please get in touch with our Tax Advisory team and we will be happy to advise you on the most tax efficient way to sell your assets: firstname.lastname@example.org