It has been reported that the Chancellor is considering overhauling the tax-free allowances and rates for Capital Gains Tax (“CGT”) in an attempt to try and plug the looming £50 billion ‘black hole’ in the nation’s finances. These changes could be announced by the Chancellor in the Autumn Statement on Thursday 17 November 2022.
The Chancellor is reported to be looking at CGT as any changes to this tax would only impact a limited number of taxpayers (around 323,000 individuals paid CGT in the 2020-2021 tax year) and the changes could potentially raise a significant amount of revenue for the Treasury.
Making changes to CGT would also chime with the government’s stated position that it should be the wealthiest in society who bear the brunt of any significant tax increases in the current economic climate given the ongoing cost of living crisis (which is disproportionately affecting those on lower incomes).
What is CGT?
CGT is levied on profits made when some assets are sold for a gain. According to the Office of Budget Responsibility, on current projections, CGT is expected to raise £15 billion for the 2022- 2023 tax year (around 1.5% of all tax receipts).
Above the current annual tax-free allowance of £12,300, basic rate taxpayers pay CGT on most assets at 10% while higher rate taxpayers pay CGT at 20%. When selling residential property which does not otherwise qualify for an exemption, the above rates are subject to an additional surcharge of 8% (so 18% for basic rate taxpayers and 28% for higher rate taxpayers).
What could happen to CGT tax-free allowances?
The Chancellor is reportedly considering significantly reducing CGT tax-free allowances from £12,300 per taxpayers down to £6,000. At present, taxpayers can make a gain of up to £12,300 every tax year without any CGT being payable.
In the 2021 – 2022 tax year, the government records indicate that 129,000 individuals were required to file CGT tax returns for gains made on residential property. The above change would result in many more individuals facing a CGT liability on the disposal of their assets.
How might CGT rates change?
It has also been reported that the Chancellor is considering aligning CGT rates with income tax rates.
It has been speculated for some time that the Chancellor is considering increasing rates from 10% to 20% for basic rate of taxpayers, from 20% to 40% for higher rate taxpayers and from 20% to 45% for those in the highest tax bracket.
Experts have predicted that if the rates were to be increased to the above levels then it is likely that the additional property surcharge referred to above (currently 8%) would cease.
It has been reported that increasing the CGT rates so that they are in line with income tax could raise as much as £16 billion for the Treasury.
What can I do about changes to CGT?
Of the above two options, experts have predicted that it is the increase in CGT rates that is likely to be the most lucrative for the Treasury.
Critics have hit out at the possible changes to CGT, arguing that any changes would lead to individuals delaying transactions due to the increased CGT liability and that this consequently would weaken economic growth and potentially stall the property market.
They argue that any CGT increases would be likely to change people’s behaviour as they would be reluctant to go through with transactions and as a result the changes would not even significantly increase revenues.
They have also argued that any increases to CGT could lead to individuals becoming ‘accidental landlords’ as they are forced to rent out their property rather than facing a hefty CGT bill when selling.
The government have also come under fire from critics who say that the proposals are fundamentally ‘unconservative’ and that a Conservative led government should be looking to reduce the tax burden rather than increase it. Tomorrow’s statement will inevitably see a number of people concerned about their assets and if you would like to discuss CGT and how any of the new changes (if they are introduced) affect you please contact Amy Lane.