HMRC considering Capital Gains Tax Increases
A review of capital gains tax commissioned by the chancellor was completed last week and it is proposing big reforms to the tax. The amount of tax paid on capital gains is a lot lower in the UK compared with other European countries which we've covered in this blog post. For example, £100,000 gains on residential property will attract 33% more tax in Ireland than the UK. As well as collecting less revenue than other countries, the tax criticised as being unfair to those paying income tax.
It now looks likely that the chancellor Rishi Sunak will be able to use coronavirus as cover to restructure CGT. The review was carried out by the Office of Tax Simplification and it recommends some drastic changes to the levy.
Who will the proposals impact?
· Landlords – Landlords currently pay 28% CGT on gains within the higher earnings band. In addition to the lower rate, the exemption is £12,300.
· Private Equity and other Investors – private equity partners make most of their profits in carried interest. This is currently taxed at 28% as a capital gain. Profits on share disposals are currently taxed at 20%.
· Business Owners – business owners can benefit from entrepreneur’s relief when they dispose of or liquidate their business. This reduces the rate of tax on gains to just 10%.
What was recommended by the OTS?
Firstly, they took aim at the CGT allowance. At £12,300 it is substantially higher than in other countries. The OTS talks about a cut to below £4,000.
The OTS is particularly critical of individuals who manage to pay CGT on the proceeds of their work. This takes particular aim at private equity directors and other business director shareholders who can benefit from an increase in value of the share capital within their business which is often derived from the cash retention.
One recommendation which will impact property owners would be the crystallisation and charging of capital gains on inheritances. Currently, there is no capital gains tax charged on inheritances and the beneficiary is deemed to inherit the asset at its value on the date of the death. This is referred to as the capital gains uplift rule, which if scrapped could expose the disposer to large capital gains liabilities.
The OTS report also recommends that the number of different rates used to calculate CGT should be reduced from four to two. These should be brought in line with rates paid on income tax.
What is the MJH view?
Our opinion on the changes is mixed. Whilst the ICAEW has come out in defence of the current system, we are of the view that is overly complicated in ways and could be made easier. Any changes do need to bear in mind that CGT is seen as a reward for taking on risk and entrepreneurship. Changes to the system should still need to reward risk taking that underpins the country’s economy.
The number of rates should be reduced to two. The rates should be increased but do not need to be brought in line with income tax rates. This incentivises people who are taking risks whilst creating a more equitable system and generating additional revenue for the exchequer.
Increasing CGT would make buy to let property investment less desirable which should make property more affordable. On the flip side, any CGT increase by the government would be accompanied by the removal of the stamp duty holiday and follows on the heels of a mortgage being excluded as a tax deduction. At the same time the government needs to be careful about suppressing growth and discouraging investment.
Will the government act?
The report now sits with the Treasury. In the past they have ignored recommendations from the OTS, however, given the times, this could be different. Rishi Sunak has not delivered a budget yet in his time at the exchequer. Give the size of the budget deficit he now needs to manage and Boris Johnson’s commitment to spending, we would expect to see some of these measures, in what may be a phased approach, in his next budget.