In July 2020, the Office of Tax Simplification (OTS) published an online survey to seek views of individuals with experience of dealing with CGT. The OTS is an independent adviser to the Government on tax simplification and aims to help simplify tax rules. The OTS wanted to hear directly from individuals and businesses as well as advisers about the nuances of CGT and where there is room for improvement by seeking comments on the principles of CGT, and its operation in practice. The consultation closed on 9 November 2020. The recommendations by the OTS to the Government are in summary:-
- CGT rates are brought in line with income tax rates, so CGT will be chargeable at 20%, 40% or 45%, depending on your personal income tax position.
- Investors’ Relief (which reduces CGT on the disposal of shares in a trading company) be abolished.
- The annual CGT allowance (currently £12,300 for individuals – see below) is reduced. There are also currently CGT allowances for the disposal of chattels, which the OTS has recommended are reformed.
- Currently, when someone dies, the value of their assets are uplifted (rebased) to the value at death, thus extinguishing any CGT charge, as those assets may then become subject to Inheritance Tax. The OTS has recommended rebasing is removed where no Inheritance Tax will be payable, so the beneficiary of someone’s estate is deemed to acquire the asset at the value when the deceased originally acquired the asset, thus increasing the potential CGT on any future disposal by the new beneficiary.
This article focuses on the current rules.
CGT is payable on gains that arise on the disposal of chargeable assets by a chargeable person. Chargeable people include individuals, executors and trustees. Assets that are chargeable to CGT include (but are not limited to) property, land, stocks and shares and other items including chattels and works of art. A disposal for CGT purposes is made whenever the ownership of assets is transferred and this includes the sale or gift of assets. There are some instances where CGT is not chargeable such as (but again not limited to) the transfer or gift of money, motor cars, certain investments, compensation payments and lottery winnings.
Here’s a brief (but not exhaustive) summary of the current CGT rules which may be of use when considering your CGT position, particularly as a change to CGT is likely to be on the horizon:
- Everyone has an annual CGT allowance of £12,300 (for the tax year 2020/21) which must be used every tax year or the allowance is lost and cannot be carried forward to future tax years. You can, however, carry forward CGT losses from previous tax years to offset against gains in the current tax year.
- Trusts have an annual CGT allowance of £6,150 (for the tax year 2020/21).
- If you are a higher rate tax payer, two rates of CGT apply - 28% on gains on residential property, and 20% for gains from other chargeable assets.
- If you are a basic rate tax payer, the rate you pay depends on the size of the gain, your taxable income and whether your gain is from residential property or other assets.
- You do not pay CGT when disposing of certain assets (see above) which includes the sale / disposal of your home (so long as it has been your principal private residence throughout the period of ownership).
- In addition, spouses and civil partners can take steps to fragment gains between them. Specialist advice should be sought.
As set out above, it has been suggested by the OTS that CGT charges could be aligned with the income tax brackets for individuals, meaning for higher rate tax payers the CGT charge could increase from 20/28% (depending on the asset being disposed of) to potentially 45% if you are an additional rate taxpayer.
COVID-19 caused a significant downturn in the financial market in early 2020, and whilst it has bounced back slightly, it is perhaps inevitable that there will be further fluctuations before life returns to a ‘new normal’. Assets that you may not have considered giving away previously (because they were pregnant with gains) could now have gone down in value. It may now be appropriate to consider whether to give them away, before the value potentially increases, or before the Government makes significant changes to the current regime, which could avoid a CGT charge altogether, or at least mitigate the CGT charge compared to what this would have been pre-Covid-19. Now is therefore an opportune time to review your CGT position and possible exposure to CGT by taking steps to mitigate any future CGT liability before the rules applicable to CGT potentially change.