It has been forecasted that the government will need to find up to £40 billion a year to recover from the mass deficit created by the unprecedented levels of government spending during the ongoing pandemic.
Inevitably, the recuperation of £40 billion a year will derive from substantial cuts or additional revenue; and possibly various forms of tax changes introduced by Rishi Sunak in the upcoming Budget due March 2021 – with a potential target being Capital Gains Tax.
Following a request from the Chancellor, Rishi Sunak, the Office of Tax Simplifications (OTS) published its first report, on 11th November, into the review of capital gains tax (CGT).
OTS Recommendations to the Treasury:
Aligning CGT rates with income tax.
Due to the difference in rates of income tax and CGT, taxpayers try to convert their income into capital gains; therefore, by aligning the rates of income tax and CGT it would simplify the tax rules and there would be no need to complex anti-avoidance provisions that have been implemented to police the boundary between income and capital gains.
However, a concept that needs to be taken into consideration is that if these two rates were to be aligned, there would be a need for consequential changes due to potential factors if may affect:
- There would be a possibility of averaging gains over the holding period of an asset. This would mean that a basic rate taxpayer does not have to pay tax at a higher rate due to a large gain that has realised in a particular tax year
- Making some allowance for inflation
- Allowing more flexible use of losses
- Discouraging people from using companies as asset holding vehicles in order to access the lower rates of corporation tax compared to any increased rate of CGT
Lower the annual exemption on CGT; and therefore, almost doubling the amount of people who become liable to pay tax annually
Currently, the annual exemption on CGT is set at £12,300. If Rishi Sunak were to agree with the OTS’ recommendation, the exemption would be lowered to £2,000 to £5,000 which consequentially results in an increase of revenue between £500 million to £900 million as 300,000 to 400,000 more individuals would need to pay Capital Gains Tax.
Taxing share sales as income
As the rates of income tax and CGT are not aligned at present, the Office of Tax Simplicity has suggested that it may be less complex if certain share sales were taxed as income; in particular share incentives for employees and retained earnings in small owner-managed businesses.
The OTS has recommended that the government should consider taxing more share-based rewards from employment as income rather than capital gains as a method to help close the £40 billion deficit gap that has been created due to the COVID-19 pandemic.
In regards to owner-managed business, the OTS believes that it must be determined whether an individual who accumulates trading profits within a company and then sells the company; which consequentially means that they will be paying capital gains on the profit on the sale, will be in a better position that someone who carries on a business in their own name and/or receives the profit as salary or dividends.
The main argument in this circumstance is that as the profits relate to the individual’s labour, they should be made subject to income tax rather than CGT.
Lifetime gifts and gifts on death
Removal of the “uplift on death relief – which currently allows beneficiaries to inherit an asset at market value on the date of death as opposed to the value on the date of purchase. Alternatively, an amendment of this relief so that assets are re-based to 2000, for example, rather than the date of death.
Entrepreneurs’ relief/business asset disposal relief
The Office of Tax Simplicity has recommended further reductions (or potential elimination) of mistargeted BADR (business asset disposal relief, formerly known as entrepreneur’s relief). Following on from this, they believe that it should be replaced with retirement relief (which was abolished in 2003 due to its complexity) as a method of business owners and managers to build up the value in their businesses as a form of pension arrangement.
Abolishment of Investors’ Relief
With support of the minimal evidence that individuals are utilising Investor’s Relief since it was introduced in 2016. The OTS have recommended that it should be abolished.
Although it remains unknown whether Rishi Sunak will implement these recommendations suggested by the OTS, it would be wise for investors, private equity executives and owner-directors (amongst others) as well as anyone else holding assets standing at a significant gain, to take the contents of the report into consideration and take advice on their options over the next few months.
As the government will most certainly be looking for methods to raise revenue that are politically acceptable; this will inevitably include targeting the wealthy as CGT is a pathway that can be used as a way to raise tax revenue without breaking the government’s manifesto agreement.
If you require any further information on this, please do not hesitate to contact our team for further information.
– Frontier Fiscal Services