Insights

Rishi Sunak has dropped some heavy hints that taxes will be increasing to cover the cost of the financial support provided by the government during the Covid pandemic. Borrowing has been the primary source of this support - the government’s deficit for the 2020/21 financial year will be almost £300bn and the national debt is now more than 100% of the UK’s Gross Domestic Product. The means of repayment must come from somewhere and taxes are the most obvious place.

One of the clearest signals that imminent changes are afoot is evident in Sunak’s request for a review of Capital Gains Tax (CGT).  His brief, which was issued to the Office of Tax Simplification (OTS), has asked for a report on how CGT rates compare with other taxes and how ‘’the present rules can distort behaviour’’. Alongside previous comments by the OTS that certain aspects of CGT are anomalous, the writing seems to be on the wall for CGT to be brought more into line with other types of personal taxes.  The current top rate of income tax is 45%, and the inheritance tax rate is 40%, whereas the highest rate of CGT is 28%.

How could capital gains tax be reviewed?

We have already seen the reincarnation of Entrepreneurs’ Relief into the far less advantageous Business Asset Disposal Relief, which has a much reduced relief ceiling of  £1m. It can also be expected that we are going to see an increase in CGT, either by the increase in rates of tax, the reduction in allowances, or both.

The OTS will now begin gathering evidence to inform its report, which will be published towards the end of this year. This means that any changes will probably become effective from 6 April 2021, when the next tax year begins. If however sweeping increases are announced earlier, in the autumn 2020 budget, they may be effective immediately to preclude a frenzy of last minute tax planning.

Next steps?

In the meantime can you, should you, do something?

Unfortunately asset values are depressed at the moment, which means that selling assets to crystallise capital gains at the current rates of CGT may not be attractive. If however it is attractive, this should perhaps be considered.

In any case, now is definitely a good to time to review capital assets to see whether gains can be otherwise crystallised now, to increase their base cost for a future sale when potentially higher tax rates will apply.

It is never a good idea to make financial decisions purely for tax reasons, but it is always sensible to take these into consideration as an important factor. If you would like advice on capital gains tax and whether you should take action in the event of a possible review, contact us via partners@rjp.co.uk