According to new research from UHY Hacker Young, of the capital gains made in the past year, an effective rate of only 14.9 percent tax was paid, down from 16.5 percent a decade ago. As a result of this, the Government could change CGT rules from next week to ensure the tax brings in more money for the state’s coffers.
CGT changes likely
UHY Hacker Young said the relatively low rate of CGT being paid may mean the tax could be targeted by the Chancellor in the next budget on October 27. The likelihood of this occurring is relatively high as a report by the Office of Tax Simplification published in November 2020, recommended that CGT rates be increased to bring them in line with income tax.
However, UHY noted the Government will need to approach any rate increase with caution. The majority of CGT is paid by the “very wealthy” – 41 percent of the total yield last year was from 2,000 taxpayers who made a taxable gain of £5million or more on assets sold.
In the event of an increase, such individuals may choose not to sell their assets and Graham Boar, a Partner at UHY Hacker Young, warned against this.
“The decreasing effective rate of Capital Gains Tax paid suggests many investors are making as much use of the tax reliefs as they can,” he said.
“Whilst they are well within their rights to do that, it is impacting HM Treasury’s desire to maximise tax revenues.
“Clamping down further on some of the CGT reliefs seems a logical next step, as well as looking at the headline rate.
“The Government is under pressure to raise CGT rates to cover Covid public spending and to fund social care. However, it must be careful not to disincentive investors from selling their assets. This could see the yield from CGT drop, negating the increase.”
Under the current rules, higher-rate taxpayers should pay a CGT rate of 28 percent on the sale of residential property or 20 percent on the sale of other assets such as shares.
In 2019-20, just £9.3billion of CGT was paid on gains worth £62.7billion, giving an effective tax rate of 14.9 percent .
UHY Hacker Young said this was the result of people becoming more aware of the reliefs available to them but it went on to provide tips on how people can reduce their CGT bill further.
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How to reduce your CGT bill
Methods of reducing one’s CGT bill include:
- Offsetting losses from the same year or an earlier year against the gain
- Using reinvestment reliefs, applicable mostly to business assets
- Using tax incentivised investments, such as Seed Enterprise Investment Scheme, Enterprise Investment Scheme and Social Investment Tax Relief
- Sharing gains with family members, especially spouses, and using the tax free annual exemption
- Claiming reliefs such as Business Asset Development Relief (formerly Entrepreneurs Relief) or exemptions, such as when selling a business to an employee ownership trust
- Maximising the Primary Residence Relief (PRR)which applies to the sale of a taxpayer’s only or main home. So if someone has a second home in a high-growth area, e.g. a flat in London, they can switch this to their main residence to maximise PRR.
UHY Hacker Young is not the only company to issue warnings on CGT changes. In recent weeks, a number of experts have warned Rishi Sunak may have no choice but to target CGT in his upcoming Budget.
Kay Ingram, a chartered financial planner, recently warned the Government is running out of options and capital taxes on wealth is “the only lever left for the Treasury”.
Ms Ingram continued: “I believe it is the most likely area for further tax increases.
“A Conservative Chancellor is unlikely to go as far as the self styled Wealth Tax Commission which last year called for a one off levy of five percent on all those whose assets exceeded £500,000.”
In August, figures from the Treasury showed CGT receipts hit £9.8billion in the 2019/20 tax year, up four-fold from the £2.5billion seen a decade ago.
Shaun Moore, a tax and financial planning expert at Quilter, said he expected this trend to continue.
“This is likely to just be the start of record years for the amount brought in by capital gains tax and preliminary data from the Office for National Statistics is already showing this will be the case,” he said.
Last week, Ami Jack, Head of National Tax at Smith and Williamson, also warned CGT would be an “easy target” for Mr Sunak.
Ms Jack concluded: “Significant increases to the CGT rate, or changes affecting small companies, could risk discouraging potential entrepreneurs, stunting growth and job creation.
“Given the need for economic recovery, the Chancellor may protect reliefs that encourage investment and entrepreneurship.
“Options could be a smaller rate rise, say to 30 percent, CGT rate increases only on disposals of more passive types of investment, such as on rental property, as well as more technical changes to CGT reliefs.”Internet Explorer Channel Network