Simply put, capital gains tax (“CGT”) is paid when an asset, other than your main residence, is sold at a profit. Currently there are four rates of CGT being 18% and 28% on UK residential property and 10% and 20% on all other assets (the rates depending on whether the taxpayer pays basic or higher rates of tax). This contrasts with the highest rate of income tax at 45% in England and Wales (46% in Scotland).
Earlier this year, the Chancellor, Rishi Sunak, asked the Office of Tax Simplification (“OTS”) to undertake a review of CGT, in particular to consider whether there were any discrepancies between the various tax regimes which could be ironed out.
Yesterday, the OTS stated that following their review they felt that CGT was counter-intuitive and can distort taxpayer behaviour. They have suggested that the government should consider either “closely aligning CGT rates with income tax rates, or addressing boundary issues between CGT and income tax.” This includes not only the actual rates of taxes, but also a reduction in the capital gains annual exemption – currently this is set at £12,300 and only if your total gains are more than this will you pay CGT.
It is also worth noting that last year the OTS made recommendations on changes between the interaction between CGT and inheritance tax. In particular removing the automatic tax free uplift in base cost on assets for capital gains purposes when the individual dies. To date no action has been taken to implement this suggestion.
Whilst at this stage it is not clear that the suggested doubling of CGT rates will be enacted, there is a clear disparity between the rates and with the current economic climate, it is likely that changes to capital gain regime will take place in the future.
It would be fair to expect that any change would apply with immediate effect and that anti-forestalling provisions would also be put in place, so any change will be difficult to plan for. That said, timing is everything, and if a capital gain is inevitable, acting now may lead to the best tax outcome.
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