The Chancellor of the Exchequer, Rishi Sunak, has asked the Office of Tax Simplification to review the operation of capital gains tax (CGT) and aspects of chargeable gains relating to individuals and small businesses. The scope of the review is to 'identify, and offer advice to the Chancellor about, simplification opportunities relating to administrative and technical issues […] as well as areas where the present rules can distort behaviour or do not meet their policy intent.'
The move comes amid downbeat economic projections in the UK and, despite the neutral language of the scope of the report, has sparked speculation that tax hikes will not be far behind, Treasury sources have been quick to suggest there is no truth the review would be used to raise taxes and pin the borrowing bill on the wealthy – pointing out that it was merely a follow up to the review of inheritance tax last year which has not yet led to any tax rises.
However, the Office for Budget Responsibility (OBR), the Treasury’s independent economic forecaster, recently warned that the UK is likely to incur its largest peacetime budget deficit ever, at £322bn and said the government would come under pressure to fill the shortfall with tax rises or spending cuts to bring the government finances back into balance. The OBR has also suggested that there may be steep falls in CGT receipts over the next two years as property and other assets slump in value, applying further pressure on Sunak to increase tax rates to fill the gap.
This week, the Office for National Statistics also revealed disappointing GDP figures: GDP fell by 19.1% in the three months to May 2020, with all industry sectors showing a decline. Monthly GDP figures for May 2020 show a small increase of 1.8%, but this is still almost 25% lower than GDP in February, prior to the coronavirus restrictions coming into place. Expectations of a 'V' shaped recovery are being replaced with more modest hopes for a 'swoosh'.
The political question is not just how do we pay for this but who pays for this?
CGT is charged on a sale or a gift of assets, generally at a rate of 10% for basic rate taxpayers and 20% for higher rate taxpayers and, on the sale of residential property, at rates of 18% and 28% respectively (excluding your main residence). There are important exemptions such as for transfers between spouses and the individual annual exemption (£12,300 for 2020/21). Mr Sunak could be contemplating aligning CGT rates with income tax rates (20% for basic rate taxpayers, 40% for higher rate taxpayers and 45% for additional rate taxpayers). We might also see existing reliefs and exemptions curtailed. Such changes would both simplify the tax system and raise additional funds. Given that much of the UK's wealth is tied up in people's homes, restricting the CGT exemption on a person’s main home, might also be something he considers. Historically, income tax rates and capital gains tax rates were much more closely aligned than is currently the case and so there is certainly scope to bring them much closer together but it is likely that there would also need to be some form of indexation re-introduced so as to allow for the element of any gain which solely arises as a result of inflation.
The revenue generated by CGT has been steadily increasing over the years, with almost £9bn paid in the 2017/18 tax year by 281,000 taxpayers (both individuals and trusts), although its take is much lower than income tax, VAT or corporation tax. In line with previous years, approximately half of the CGT was incurred by those in the 45 to 64 age bracket, with the next highest paying age group those in the 65 to 74 bracket, at £1.5bn. This is unsurprising as older age groups will have been able to hold their assets for longer, and this may well be a consideration for Mr Sunak as he looks to avoid hitting the younger generations who are more likely to suffer economically from the outcome of the pandemic.
The OBR has indicated that the UK now needed to raise 50 per cent more from tax increases each decade than would have been required before the pandemic. The alternative would be for the prime minister to break his promise of not imposing austerity measures. There was now a need for £60bn of tax rises per decade to stabilise the public finances. The OBR has said that "in almost any conceivable world there would be a need at some point to raise tax revenues and/or reduce spending to put the public finances on a sustainable path."
Despite the Treasury and government ministers' statements to the contrary, there is no guarantee that we will not see increases to the rates of CGT at the next Budget and indeed this was not one of the promises made by the Conservatives in their manifesto (whereas they did promise not to increase the rates of income tax, VAT or national insurance). Whether this would in fact result in an increase in tax revenue, however, needs to be carefully thought through by the Chancellor.
Individuals concerned about the effect of possible rates increases may wish to consider making disposals ahead of the Autumn Budget later this year. Please contact your usual Withers contact if you wish to discuss this or any other possible planning at this time.