TaxAAM Getting ready for UK Capital Gains Tax changes

Getting ready for UK Capital Gains Tax changes

It was inevitable that sooner rather than later, UK Chancellor of the Exchequer Rishi Sunak, would put taxpayers on red alert that taxes will have to rise to pay for the £190billion of support the UK Government has given the economy to steer it through lockdown and beyond.

The alert came on 14th July, just under a week after delivering his mini-Budget aimed at staving off a massive jump in unemployment and encouraging people to go out and spend money on the high street and in pubs and restaurants.

First, he set the cat among the pigeons by commissioning the Office of Tax Simplification (OTS) to undertake a review into capital gains tax (CGT). Although nothing may come of the work, it is surely no coincidence the review will be completed before Sunak delivers his Autumn Budget – thereby enabling him to follow through with any changes.

Some experts believe the tax represents low-hanging fruit for the Chancellor, given that it is levied at rates lower than those applied to income.

The following day, Sunak ratcheted up the pressure a little more. Speaking to the Treasury Select Committee, he admitted that ‘tough choices’ lay ahead – code for tax rises. While refusing to be drawn on whether he intended to break promises made in last year’s Conservative General Election manifesto – namely, no raising of rates in income tax, national insurance or VAT – it seems unlikely that he will incur the wrath of Tory supporters by going down this route. His mention of the need for a ‘sensible conversation’ on taxation suggests other taxes will be targeted instead – which leads us back to capital gains tax.

What CGT changes could mean

Rishi Sunak’s brief to the Government’s tax gurus includes looking at whether the levy on asset sales is ‘fit for purpose’, ways it can ‘distort behaviour’, and the current regime of allowances, exemptions and reliefs.

That all translates as ‘tax grab’. So, what might it mean for people’s wealth held in investments, property and other assets that are – and currently aren’t – subject to capital gains tax? Some of the options include:

Aligning CGT and income tax: Gains from investments and dividends, and property aside from people’s own homes, are taxed differently from earned income.

In its 2019 election manifesto, Labour proposed bringing CGT into line with income tax rates, which would mean big hikes for higher earners and smaller increases for basic rate taxpayers and last year the influential think-tank the Institute for Public Policy Research (IPPR) also suggested CGT on people’s wealth tied up in assets like investments, second homes and buy-to-lets should be hiked to income tax levels.

Changing ‘main residence’ relief: The OTS is bound to look at this, but hitting people selling their own homes with CGT would spark a storm of opposition. It would also run counter to government efforts to get the property market moving again by cutting stamp duty.

Ending the ‘uplift’: The OTS already recommended getting rid of this in a review of inheritance tax, so it will probably take another look at this issue. The ‘uplift’ means someone inheriting an asset is treated as acquiring it at its market value on the date of death, rather than the amount it was bought for. This means the beneficiary can sell it shortly after the death without paying CGT.

Abolishing the exempt allowance: Labour wanted to slash the annual exempt CGT allowance, which is currently £12,300, to £1,000, if it had won the last election. The IPPR also favoured this move.

Axing other reliefs and exemptions: Many capital gains lie outside the current system, such as winnings from gambling, wine, and car investments. The OTS might find little justification for keeping such exemptions. Meanwhile, ‘exemption at death’ encourages people to hold assets for life to allow beneficiaries to avoid CGT, although they may still be liable for inheritance tax. ‘Entrepreneurs’ relief’ for assets relating to businesses – aimed at encouraging entrepreneurship – means gains are taxed at a lower 10 per cent. Now renamed business asset disposal relief, the applicable lifetime gain was already cut from £10million to £1million, but it could be reformed again or abolished entirely.

So how does this affect me?

In summary we can expect the subject of tax reform to be considered in the Autumn Budget later in the year, and, in the meantime, planning ahead remains vital to protect your wealth from the impact of potential future tax changes – but this must always be done in a non-contentious way that is compliant with both the letter and the spirit of the law.

As everyone’s financial situation and goals are different, before acting you should take professional advice to consider the effectiveness of any proposed course of action, the level of flexibility offered and the costs versus the benefits – in other words:

  • does it work?
  • can you change it easily if the rules change?
  • does it provide value for money?

To find out how you can protect your wealth in the new normal, speak to your AAM Wealth Manager or email [email protected]


Important information

This article is intended for general circulation and information purposes only.  It may not be published, circulated, reproduced or distributed in whole or part to any other person without prior consent of AAM. This article should not be construed as an offer, solicitation of an offer, a recommendation or provision of financial advice. The information does not take into account the specific investment objectives, financial situation or particular needs of any person. Advice should be sought from a licensed financial adviser before making any decisions. Whilst we have taken all reasonable care to ensure that the information contained in this article is not untrue or misleading at the time of publication, we cannot guarantee its accuracy or completeness. Any opinion or estimate contained in this article is subject to change without notice. AAM Advisory Pte Ltd is licensed by the Monetary Authority of Singapore, FA Licence no. 100032.

Book a complimentary financial review with one of our wealth managers.