Tag: capital gains tax


Capital gains tax: What could the review mean?

Rishi Sunak recently announced a surprise review of capital gains tax (CGT), following a report by the Office for Budget Responsibility (OBR) that highlighted how the growing deficit in government spending was likely to exceed £350bn in 2020. The Chancellor asked the Office for Tax Simplification to report on how CGT rates compare with other taxes and how present rules may distort taxpayer behaviour.

There could be widespread tax rises as the government attempts to claw back the cost of extra spending during the coronavirus pandemic. The OBR said the Treasury was likely to suffer steep falls in capital gains tax receipts over the next two years as property and other assets fall in value. A tax rise could fill this gap.

What is CGT?

CGT is a tax on the profit when you sell something that has increased in value. You are only taxed on the amount it has gained in value. Most often it applies to gains made on property and shares, but may also apply to assets like art works. The OBR previously forecast that the tax would raise £9.1bn in the 2019/20 tax year, accounting for 1.1% of all tax paid in the UK.

Private homes are exempt from this tax, but you still need to pay it when selling a second home or investment property. You pay CGT when you sell something that has made gains of more than £12,300 for the current tax year. So a £10,000 investment profit would not incur CGT.

At the moment, the CGT levy is 18% on second homes and buy-to-let properties, and 10% on other assets. For higher rate taxpayers, these rates rise to 28% and 20% respectively.

Why is it being reviewed?

The Conservative Party vowed not to raise income tax, National Insurance or VAT in their last election manifesto, so there are few places left for Sunak to find desperately needed income. 

There are also concerns that CGT is less than income tax, meaning that those who possess a large portfolio of assets are taxed at a rate that is lower than working people pay.

How could it change? 

Essentially the Chancellor has three choices: reduce the allowance (for example, abolish the current £12,300 annual CGT allowance), levy it against other assets (such as classic cars), or raise the rates.

While it’s highly unlikely that Sunak will abolish the CGT exemption for primary residences, he could target second homes and buy-to-lets. It’s possible that the CGT rate could be aligned with other income tax rates, at 20%, 40% and 45%, meaning those with a property portfolio could be hit hard.

Other changes could include a reduction to Business Asset Disposal relief, which currently means that business owners and significant shareholders (over 5%) effectively pay a CGT rate of 10% on lifetime gains up to £1 million. Elsewhere, the treasury could overhaul the various mechanisms accountants use to defer CGT or offset gains, with losses made elsewhere.



If tax avoidance is legal, why is it such a hot topic?

The traditional British view of tax evasion and tax avoidance is black and white: tax evasion is illegal, while tax avoidance is legal. In this time-honoured view, there was even a sense that, while tax evasion was clearly wrong, there was something laudable about tax avoidance: because, after all, “no one wants to pay more tax than he needs to”.

However, this traditional view has been taking quite a battering in recent years. Increasingly it seems, tax avoidance is coming to be regarded – by some, but by no means all – as morally reprehensible or even repugnant. This has helped popularise a third term, tax compliance. A tax avoider seeks to pay less than the tax due as required by the spirit of the law: a tax compliant tax payer seeks to pay the tax due but no more.

There are still plenty of defenders of the old view. Toby Young, writing in the Daily Telegraph in February 2011, said that “Tax avoidance isn’t morally wrong. It’s perfectly sensible behaviour.” He and those who share his views often talk about tax allowances such as are available through ISAs and pension plans, and even duty-free items on offer at airports. Who in his right mind would not take advantage of these perfectly legal opportunities? And if so, are they not avoiding tax?

It seems, though, that what has awoken the public ire is the sense of scale. Particularly when people are facing public spending cuts, tax increases and austerity, it sticks in the craw to find that the rich can apparently flout tax liabilities.

Two cases came to the fore in 2010, amongst other highly publicised examples: Vodafone and Sir Philip Green. Protesters said that Vodafone was let off a £6 billion tax bill by HMRC. Although both organisations denied this, Vodafone stores were shut by demonstrations by protesters.

If true, these allegations suggest that a large corporation is able to avail itself of treatment simply not available to most individuals – or most companies, for that matter. This question of scale goes far beyond the mention of ISAs and duty-free cigarettes, and seems to fly in the face of the spirit of the law.
Sir Philip Green is the owner of the Arcadia Group which comprises Topshop, BHS, Dorothy Perkins, Miss Selfridge and other stores. Green, the ninth-richest man in Britain, has also been the subject of protests against his alleged activities.

A representative of UK Uncut, an anti-tax avoidance organisation, wrote in the Guardian: “While Green lives and works in the UK, the Arcadia Group is registered in the name of his wife, Tina, who is resident in Monaco and so enjoys a 0% income-tax rate. In 2005 this arrangement allowed the Greens to bank £1.2 billion, the biggest paycheck in British corporate history, without paying a penny in tax. This completely legal dodge cost the British taxpayer £285m, enough to pay the salaries of 9,000 NHS nurses or the £9,000 fees of close to 32,000 students. In an age of austerity, the link between tax avoidance and public sector cuts becomes crystal clear.”

These allegations, whether true or not, became more inflammatory when Green was appointed to advise the government on how best to slash public services.

It seems obvious that this sense of indignation is not going to disappear: indeed, it is likely to grow. That being the case, high-profile figures may want to consider moving more towards tax compliance than tax avoidance when arranging tax planning.

Emergency Budget 22nd June 2010

In summary key highlights are:

Capital Gains Tax (CGT)

  • CGT will remain at 18% for basic rate taxpayers, but will rise to 28% for higher rate tax payers from midnight tonight.
  • The annual CGT allowance of £10,100 stays the same for this tax year but will increase in line with inflation year on year.

Pension Taxation

  • The Chancellor plans to launch a review of personal annual allowances for pension contributions to somewhere in the region of £30,000 to £45,000, with effect from April 2011. The Government still aims to raise the same revenue using this revised approach, as well as simplifying the rules for employers and scheme members. Individuals on income of less than £130,000, who were not impacted previously, may now be, particularly if they are a member of a Defined Benefit scheme.

The perceived ‘compulsory annuitisation’ by age 75 will be extended to age 77, while the Government consults on a permanent change to these rules. It will still not be possible to contribute to a pension after age 75