The Covid-19 crisis has exacerbated the need to raise additional tax revenues – and an increase in CGT rates won't break the government's triple tax lock promise
The Budget is fast approaching on 3 March 2021 and there is speculation that the rates of Capital Gains Tax (CGT) – a tax on the difference between an asset's value at acquisition and its value at disposal – could be increased. Such speculation has been fuelled by the chancellor's request in July 2020 for the Office of Tax Simplification (OTS) to undertake a review of CGT and has, no doubt, been intensified by the need of the government to raise funds to cover the costs of the Covid-19 pandemic. The OTS published its first report on the policy and principles of CGT in November 2020 with its second report, focusing on technical issues and administration of CGT, expected in early 2021.
The current standard rates of CGT are 10% (to the extent the gain falls within the basic rate tax band or the gain is subject to business asset disposal relief, previously Entrepreneurs' Relief) and 20% thereafter (with the rate for gains on residential property and carried interest being 18% within the basic rate tax band and 28% thereafter). Compared to the basic rate income tax band of 20% and higher rate of 40% (or 45% for the highest earners), it is no surprise, as the OTS notes in its report, that this disparity creates an incentive for taxpayers to arrange their affairs in ways that effectively re-characterises income as capital gains. The OTS highlight that more closely aligning CGT rates with income tax rates has the potential to raise a "substantial amount" (£14bn) a year for the Exchequer.
With the March Budget due amid a pandemic, some argue it is not the right time to be raising tax rates. However, the government is faced with the need to level the country's finances and preserve its promise not to raise income tax, National Insurance or VAT. Taxpayers sitting on large CGT gains may well be nervous.
It would be sensible for those taxpayers to consider their options to maximise their chances of banking the current CGT rate. That is not to say, however, that any planning put in place now might be rendered ineffective by the introduction of "anti-forestalling" measures which could be put in place alongside any rate change. Such measures could prevent individuals taking any steps to maximise their entitlement to current rates before any new rates come into force.
Osborne Clarke comment
Overall, the sentiment is that a CGT rate increase is likely. However, most commentators do not expect full alignment with income tax rates, as this would distort behaviours and encourage people to hold on to assets or leave the UK (which could have a negative impact on the tax take). It would also subject inflationary growth to full income tax rates, which is hard to justify. One option could be to raise the rate back to 28% – a level that will be familiar to CGT-paying individuals as it was the main rate (for higher rate taxpayers) from 23 June 2010 to 5 April 2016 and is currently the rate for residential property and carried interest (for higher rate taxpayers).
Another unknown is when a rate increase might be introduced. As the effects of Covid-19 persist, there is increasing commentary that changes will not be introduced in this Budget. But, as we expect the government to continue with its policy of having an Autumn Budget the rate change may be introduced then. In normal years, the Autumn Budget would be the single fiscal event of the year (followed by a Spring Statement) but this has not been the case over the past two years due to the pandemic and, before that in 2019, the general election.
Any increases to the CGT rate may come into effect either from Budget day, for which there is precedence (in June 2010 the rate of CGT was raised for higher rate taxpayers from 18% to 28% at midnight on Budget day), or else announced on Budget day with a view to the introduction at the start of the tax year (6 April).
The chancellor also has other options available to him should he wish to increase CGT revenues – such as scrapping or limiting some of the CGT exemptions and reliefs that are currently available to taxpayers. So, while we may not see a CGT rate rise in the March Budget, we may see the announcement of other changes to the CGT regime.
What, however, is clear from the OTS report is that CGT is ripe for reform.
Should you wish to consider your options with regard to any possible rate change or other change to the CGT rules, please contact any of the partners in the Osborne Clarke Tax Group whose details are below and can help further.