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If you have followed the financial news in July you will likely have heard of Chancellor Sunak’s commissioning of a review into UK capital gains tax (CGT). This follows two budgets where significant spending pledges were made to support the economy in the wake of COVD-19, leading some media pundits to speculate that tax rises could be on the horizon to help plug the £300bn+ hole which has been created in the public finances since March 2020.
In this article, our financial planners here at Cedar House offer a brief round-up on CGT in 2020 and offer some thoughts on where things may be heading. We hope you find this content helpful, and invite you to contact our team here at Cedar House for more information or to access personalised financial advice:
020 8366 4400 or enquiries@cedarhfs.co.uk
Capital Gains Tax in 2020
The UK government has been keen to position its review into CGT as “standard practice” and not sparked by any major drive to raise taxes. Rather, the stated intention is to “Identify opportunities relating to administrative and technical issues.” Yet despite these comments, the timing of the review does seem telling.
Broadly speaking, there are at least five possible outcomes from the review currently being conducted by the Office of Tax Simplification (OTS):
- CGT is kept broadly the same;
- Rates are increased (e.g. to align more with income taxes);
- Reduce CGT allowances;
- Tax things which are currently exempt (e.g. cars);
- Introduce a new taxation system (e.g. introduce a “wealth tax”).
So, those are some of the possibilities. What are the likelihoods and implications of each one?
#1 Keeping CGT the same
It is possible, of course, that CGT may be simply left untouched. In which case, your financial plan may not be dramatically affected. Yet the prevailing opinion in August 2020 is, however, that some kind of change is likely. Bear in mind that only 281,000 people paid any CGT at all in 2017/18, so any reform is likely to have a minimal political impact on the government.
#2 CGT increases
It used to be the case that CGT and income tax brackets mirrored each other. So there is a precedent for higher rates, and there were calls for this even during better times in the economy. In September 2019, for instance, the Institute for Public Policy Research proposed raising CGT to match income tax – which it claimed could raise £90bn over the next five years.
This change, of course, could dramatically affect your financial plan – such as the timing of you selling a second property (e.g. a Buy To Let).
#3 Reduce CGT allowances
In 2020-21, each individual is entitled to a £12,300 CGT-free allowance. One outcome of the review is that this allowance is reduced – perhaps considerably – or possibly scrapped entirely (which seems unlikely). Doing so could bring in more tax revenue to the Treasury, yet would also impact your plans to sell possessions which have appreciated in value (e.g. company shares). Consult your financial adviser if you are at all concerned on this front.
#4 Tax-exempt items
The biggest exemption from CGT offered to most British people (e.g. except non-residents) is on your family home. If this rises in value and you sell it to move house, then the capital gain is not subject to tax in 2020-21. It is conceivable that the government could lift this exemption or introduce a CGT, perhaps on properties which sell at over a certain threshold. Yet this seems highly unlikely given the government’s efforts to re-ignite the UK housing market through its recent stamp duty holiday. What is perhaps more likely is a change in the CGT exemptions on gifts to spouses, or CGT from betting, pools and lottery winnings.
#5 A new CGT system
One other option for the government is to completely shake up the CGT regime in the UK and stat again – possibly introducing a new system, such as a “wealth tax”. The likelihood of this, however, does seem remote. At present, the government is still wrestling with the economic fallout from COVID-19, the lockdown and budget handouts from earlier in the year. Radical reforms would take considerable time ad resources to set up properly, and the emphasis at the moment is to work quickly within the existing regime to raise funds.
Conclusion & invitation
So, where will the axe from this CGT tax review fall – if, indeed, it falls at all? Nothing that be said with any certainty at this stage. Yet certain scenarios do seem more plausible than others. In light of wider, recent government policy and the prevailing environment, possibly the first and second scenarios seem higher in likelihood. An overhaul of the CGT system seems remote, and removing certain CGT exemptions will probably raise less revenue for the government compared to changing the tax bands, for instance.
How this may affect your financial plan will depend on your distinct financial goals and circumstances. If you would like to discuss your financial plan with a member of our team, then get in touch today to arrange a free consultation:
020 8366 4400 or enquiries@cedarhfs.co.uk.