British chancellor Rishi Sunak has demanded a review of Capital Gains Tax (‘CGT’) by the Office of Tax Simplification.
The profit/increase in value on the sale or donation of properties is paid to CGT. The rates are 18 percent – 28 percent on residential property disposals and 10 percent -20 percent on other properties. There’s a £ 12,300 annual exemption per taxpayer. The disposal of your main residence is tax-free and “Entrepreneurs Relief” will see the first £ 1 million of the benefit at the lower rate of 10 percent on the selling of a company paid to CGT.
For the Treasury, CGT is not a major earner-it constitutes just about 1 percent of the annual tax revenue.
The majority’s income usually does not stretch beyond their home, pension fund, ISA’s and our savings at the Bank/Building Society. A minority of taxpayers are still liable to pay CGT.
While the chancellor Rishi Sunak briefing the OTT could be expressed as looking for ways to “simplify” the CGT system, even the least cynical would conclude that the secret message is to find ways to raise CGT’s annual take; we all know that somehow it is important to recover the government outlay during the Covid crisis. It is more politically palatable to refresh the payment structure of an existing tax than to implement a new “wealth” tax, even though any CGT reforms would mainly affect those viewed as “wealthy.”
The “simple ways for CGT revenue to increase are self-evident:
Boost The Rates
Tinker with the current exemptions or withdraw them; and remove the rise in the CGT base value of death along with a study of Inheritance Tax (IHT).
Historically, just as now, CGT rates have been lower than income tax rates – either directly or after some sort of indexation allowance has been applied. For, e.g., back in 1983, when I first registered as a solicitor, capital gains was a 30 percent flat rate, and 60 percent was the top rate of income tax (plus an additional “investment” income rate).
Profit is still a profit, rather than “capital” rather than “income”. One can see a case being made to put capital gains tax in line with income tax (on sales if not on gifts). The rate hike could be done at a stroke; it would not entail a time-consuming technical redesign of the existing tax-gain system.
Is There Any Way To Get Around Capital Gains Tax or Can You Avoid Paying Capital Gains Tax By Reinvesting?
As far as exemptions are concerned, we have already seen the cap in this year’s budget for Entrepreneurs’ relief lowered from £10 million to £1 million. In advance of the budget and business sales, this measure was generally predicted to be accelerated to completion before the budget day where appropriate.
The number 1 exemption from capital gains tax is Principal Private Residence Relief (PPR).
It would be a move of extraordinary political courage for a Chancellor to abolish or water down PPR (besides tinkering with lettings relief and the sale window of 9 months) and push CGT to a possible fee for two-thirds of UK households. While there may be absolutely no fundamental rationale for treating benefit on the selling of your property much differently than any other kind of profit, the Chancellor may be alert to the unique relationship of our nation with the idea of homeownership and an embedded, if irrational, expectation that taxes will leave the family home untroubled.
If a move to PPR is the obvious option for reform from an arithmetical/revenue viewpoint, politics and public opinion will limit the scope of such reform. To the degree that increasing the tax burden only on the ‘wealthy’ may be viewed as generally palatable by the larger public, we can only see CGT on gains above a certain threshold.