November 26th, 2020

How potential Capital Gains Tax changes could affect your clients

In the past few months, the Treasury has been under increased strain to mitigate the impact of the coronavirus on the UK economy. To fill this black hole in their budget, the government is likely to need to increase tax revenue which is why, in July, Chancellor Rishi Sunak commissioned an investigation into how Capital Gains Tax is paid, how it works, and how it could be reformed.

If the Treasury does announce a change to Capital Gains Tax, it could have long-reaching implications and many individuals and small businesses could face a much larger tax bill.

With the recent publication of that review, many experts fear that a tax rise is just around the corner. Read on to find out how the potential changes to Capital Gains Tax could affect your clients.

In March, the Chancellor announced a significant reduction in the Entrepreneur’s Relief cap

The Chancellor has already signalled that changes to CGT could be on the way. In his first Budget in March, Rishi Sunak announced a reduction in Business Asset Disposal Relief, previously known as Entrepreneur’s Relief.

This relief reduces the amount of Capital Gains Tax that a person pays when they sell their business, if they have owned it for two years or more, from 20% down to just 10%.

Previously, this tax relief had a lifetime limit of £10 million, but as of 11 March 2020, the cap was reduced to just £1 million.

The Chancellor stated that while most small businesses would be unaffected, the change would save around £6 billion for the Treasury over the next five years.

However, this change may pose an issue for owners of larger businesses, who may now face a higher tax bill as their tax relief has been reduced.

Capital Gains Tax could be raised to be on par with Income Tax

The economic impact of the pandemic and the subsequent lockdowns has been significant, and the Treasury faces a significant shortfall. According to the Financial Times, the Office for Budget Responsibility has predicted that government borrowing could reach more than £370 billion by the end of the year.

One of the potential changes suggested by the report is to change the rate of Capital Gains Tax to more closely align it with Income Tax.

Basic-rate taxpayers currently pay Capital Gains Tax at 10% when selling assets, or 18% when selling a second home. If the Chancellor acts on the report’s suggestions, this could rise to 20% for both assets and property.

On the other hand, higher-rate taxpayers currently pay Capital Gains Tax at 20% when selling assets, and 28% when selling a second home. If this were to align with Income Tax, the amount of Capital Gains Tax they would have to pay would be 40% or 45%.

These are rates clients would have to pay on any amount above the annual exempt limit of £12,300 per year. However, one of the proposals of the report was to reduce the limit to between £2,000 and £4,000 per year, which could leave your clients with a significantly higher tax bill.

Capital Gains Tax uplift could be reduced or removed altogether

Another one of the other reforms that the Office of Tax Simplification has suggested is to remove the Capital Gains Tax uplift on death.

Essentially, this uplift means that Capital Gains Tax is overlooked when an individual dies while holding assets which have appreciated in value. This is because when the assets are transferred, they are ‘reset’ for the purposes of the tax, as they are instead subject to Inheritance Tax.

One issue with this current system is that it encourages people to hold onto assets so they can be transferred tax-free when they pass away. The report states that removing this uplift, or at least reducing it, could raise significant funds as well as encouraging wealth transfers to happen earlier.

What your clients could do ahead of any proposed reform

If you want to help your clients avoid any future tax increases caused by Capital Gains Tax reform, one of the best ways you can do this for them is to ensure that they have maximised their allowances.

Here are three things that your clients could do to minimise the impact of these tax changes on their finances:

  1. Maximise their holdings in ISAs, and other tax-efficient savings vehicles
  2. Consider ‘bed and ISA’, which involves avoiding Capital Gains Tax by selling shares or investments outside of an ISA and then rebuying them within the plan
  3. Crystallising their gains before any changes come into effect, making the most of their tax-free allowance, which stands at £12,300 in the 2020/21 tax year.

Get in touch

The tangle of rules regarding Capital Gains Tax can sometimes seem like an impenetrable thicket and can make navigating potential tax changes difficult. If you have clients who could benefit from financial advice in this respect, please get in touch. Email or call 01562 829 222.

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