Capital Gains Tax reforms
The capital gains tax (CGT) system could be made simpler and fairer by reducing the annual exempt amount and raising rates to match income tax, according to a recent report from the Office of Tax Simplification (OTS).
The main proposed changes that could affect your tax bill (if the government chooses to implement them) are:
Higher CGT rates:
- OTS suggest CGT rate should be ‘more closely aligned’ with income tax rates.
- Basic-rate taxpayers currently pay:
- 10% on CGT assets, and 18% on property, and;
- 20% on taxable income.
- Higher-rate taxpayers currently pay:
- 20% on CGT assets, and 28% on property, and;
- 40% on taxable income.
If a higher flat-rate of CGT tax was introduced, it could mean basic-rate taxpayers will pay a lot more CGT than they currently do.
Reduced CGT tax-free allowance:
- OTS suggest that people’s behaviour is distorted as they rush to use their annual CGT allowance, and should be changed.
- OTS suggests the annual CGT allowance should be reduced to between £2,000 and £4,000 per individual (less than half the current allowance – £12,300).
If the CGT allowance is reduced then there are calls to exempt more personal items, so fewer assets fall into the scope of CGT.
Reduced CGT tax-free allowance:
- OTS suggests removing CGT uplift on death, where an IHT exemption or relief has been given, and pay CGT based on the price paid by the person who has died.
The removal of the CGT uplift would have the desired effect of providing additional income for the government, but add complexity when it comes to administering estates, as executors and their professional advisers would need to hunt down historic records to confirm the base cost before calculating any subsequent tax charge.
Summary
It remains to be seen which avenues the government will decide to pursue and we will closely monitor developments in this area; a second paper is due in early 2021.