Speed of OTS report suggests ‘high alert’ for CGT reform
12 November 2020
Capital Gains Tax could be increased to help the UK economy recover in the wake of the Covid-19 pandemic, a new report has suggested.
A report from the Office of Tax Simplification recommended raising CGT rates to align them more closely with income tax, while also cutting annual tax-free allowances.
Such a move could raise as much as £14 billion for the beleaguered Treasury which has seen national debt soar to more than £2 trillion as a result of Covid-19 and is under increasing pressure to plug the black hole.
Rachael Griffin, tax and financial planning expert, Quilter, says: “Chunky reports from the government aren’t known to be produced at speed unless there is a real requirement. The OTS itself acknowledges the consultation has been produced in a shorter timeframe and this hints that change to CGT will be on the cards as the Chancellor looks to counteract the escalating deficit caused by the pandemic.
“The appeal of changing CGT is clear – only a relatively small number of people pay it. It means the tax can be reformed in order to squeeze asset owners, shareholders and landlords without impacting the majority of people.”
In its findings, the OTS said a starting point for an efficient tax system should be neutrality and warned that the current rate disparity between income tax and CGT has created an incentive for taxpayers to “arrange their affairs in a way that effectively re-characterise income as capital gains.” It said greater alignment of rates would reduce the need for complex rules to police the boundary between income and gains.
The total amount of GCT paid in 2017/18 was £9 billion on net gains of £58.9 billion. By comparison, £180 billion of income tax was paid during the same year by 31.2 million taxpayers.
Laith Khalaf, financial analyst, AJ Bell, believes investors should be “high alert” for a tax raid.
Khalaf said: “The Chancellor ordered this review of capital tax and while recommendations are conditional rather than categoric, it seems like change is afoot, possibly in a spring Budget.
“If CGT rates are increased, there could be a fire sale of assets as investors sitting on big gains seek to take advantage of current rates before any deadline for transition. Investors would also likely flock to pensions and ISAs, where gains are not subject to capital gains tax.”
The OTS report also recommended that the Government consider reducing the current £12,300 tax-free allowance. According to its findings, a reduction to £6,000 would result in 235,000 more individuals needing to report a capital gain and could generate £480 million in additional revenues in the first year.
A steeper reduction to £2,500 would result in 360,000 more individuals falling into the CGT net and raise an extra £835 million in additional revenues.
Griffin commented: “Their view is that while small gains should still be exempt in order to avoid administrative hassle for the sake of a minor tax bill, the current allowance results in too many profits being tax free. Cutting it to around £5,000 could see the number of people paying CGT each year doubling.
“Although the OTS do not acknowledge the variety of assets that are notably free of CGT such as lottery wins, classic cars and vintage wine. This may raise some eyebrows as they seem like easy areas to target the wealthy if that is indeed the government’s goal.”
Other proposals included scrapping CGT uplift on death, however, Griffin warned this could have far-reaching consequences. According to Griffin, one of the biggest challenges facing the Government in amending the CGT system is its interaction with several other parts of the tax system, in particular inheritance tax.
Griffin added: “CGT uplift means that CGT is overlooked when an individual dies and they hold taxable assets that have gone up in value. This is because when the assets are transferred to someone else, normally a spouse or family member, they are ‘re-set’ for CGT purposes. Instead, the assets may be subject to Inheritance Tax.
“The OTS recognise that this means that people are often holding onto assets until they die for the tax benefits. Removing or limiting this relief could be seen as a way to encourage wealth transfers to happen earlier, as well as raising significant funds.”
Looking ahead, Khalaf cautioned that there was still the question of whether a CGT overhaul will prove “politically palatable,” but said the traditional Tory commitment to lower taxation would have little standing in a post-Covid environment.
He added: “This isn’t the kind of policy a Conservative government would typically like to bring in but then these are extraordinary times and the government has shown it’s willing to do all sorts of things which aren’t compatible with traditional Tory values of fiscal caution and light touch government. Allegiance to lower taxation is also likely to prove a casualty of the pandemic.
“Looking at just how much money the government needs to recoup as a result of coronavirus, CGT is likely to be the thin end of the wedge, because it won’t balance the books on its own. Pfizer’s vaccine has given us a glimpse of life after the pandemic, but along with that hopeful outlook, we should prepare for tax rises too.”
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