CGT ‘tax raid on horizon’ as Chancellor fights escalating deficit

Jenna Brown reports

The Office for Tax Simplification (OTS) has proposed a number of reforms to capital gains tax (CGT) in a hastily produced report, fuelling speculation that the Chancellor is set to make significant changes.

Quilter tax and financial planning expert Racheal Griffin said it was unusual for the government to produce “chunky reports at speed” unless there was a real requirement. The OTS itself acknowledged the consultation had been produced in a shorter timeframe than usual.

Griffin said: “This hints that change to CGT will be on the cards as the Chancellor looks to counteract the escalating deficit caused by the pandemic.

“The appeal of changing CGT is clear – only a relatively small number of people pay it. Statistics show that over the course of a decade around 1.5 million people reported taxable gains, far lower than the numbers paying the biggest taxes like income tax and national insurance.

“It means the tax can be reformed in order to squeeze asset owners, shareholders and landlords without impacting the majority of people.”

CGT is, she added, almost exclusively paid by older, wealthier households.  According to the OTS, 97% of CGT tax revenue is paid by over 35s, with most people caught by the tax in their 50s and 60s.

“It means that raising additional revenues can be positioned as a tax on those with the broadest shoulders.”

The OTS has outlined a series of reforms some of which are minor adjustments to the current rules with other more significant changes which could “cause a bit of a stir,” according to Griffin.

These include the option of bringing CGT in line with income tax. Simplification to two rates rather than four is also suggested.

Griffin (pictured) said: “Other proposals, such as scrapping CGT uplift on death, have far-reaching consequences and need to be considered carefully. One of the biggest challenges of tinkering with the CGT system is its interaction with several other parts of the tax system, in particular inheritance tax, so many changes can be complex and have knock-on consequences for other parts of the tax system.

“CGT uplift means that CGT is overlooked when an individual dies and they hold taxable assets that have gone up in value. This is because when the assets are transferred to someone else, normally a spouse or family member, they are ‘reset’ for CGT purposes. Instead, the assets may be subject to inheritance tax.

“The OTS recognise that this is means that people are often holding onto assets until they die for the tax benefits. Removing or limiting this relief could be seen as a way to encourage wealth transfers to happen earlier, as well as raising significant funds.”

She added: “In general the message is clear from the government and the OTS. Use your allowances now or lose them.

“Changes are on the horizon and why it is not suitable for everyone to change their financial plans because of mere policy speculation it is worth your while to review in light of what will inevitably be a more harsh tax environment.

“Financial advice is critical for anyone wrestling with all the different rules and considering changes.”

BDO private client tax services partner Helen Jones said there was “certainly room for reform”, adding CGT and IHT should be overhauled together.

“While simplicity is to be welcomed, some will say it causes more unfairness. It is hard for governments to balance simplicity with fairness: a flat tax rate is simple, but whether it is fair that the wealthy pay the same rate of tax as those less well-off is a highly charged question.

“We agree that higher rates of capital gains tax could distort behaviour as people choose to retain assets rather than trigger a tax charge. In order to enable the economy to thrive, it is essential that capital gains tax rates remain lower than income tax rates so that we incentivise individuals and businesses to keep investing in the UK.”

She added: “If the suggested removal of capital gains uplift on death goes ahead, HMRC will need to educate people to help them understand their new record-keeping obligations. A rebasing of assets to the year 2000 value adds complexity and uncertainty to both the taxpayer and the Exchequer. Surely, any rebasing can only be effectively introduced contemporaneously?

“Simplifying capital gains tax rates is certainly a good start, but we remain far away from a simplified tax system suitable for the globalised 21st century”.

‘Tax raid’

AJ Bell financial analyst Laith Khalaf said investors should be on “high alert” for a CGT tax raid.

“The OTS has teed the Chancellor up to boost Treasury revenues by raising capital gains tax and we know how creaky government finances are after it’s thrown the kitchen sink at the pandemic.

“If a coronavirus vaccine starts to alleviate health concerns next year, the government’s attention will quickly turn to repairing the huge hole in its budget and CGT looks like it’s very much in the crosshairs. The Chancellor ordered this review of capital tax and while recommendations are conditional rather than categoric, it seems like change is afoot, possibly in a spring Budget.”

He added: “If CGT rates are increased, there could be a fire sale of assets as investors sitting on big gains seek to take advantage of current rates before any deadline for transition. Investors would also likely flock to pensions and ISAs, where gains are not subject to capital gains tax.

“There is still the question of whether this will prove politically palatable, as this isn’t the kind of policy a Conservative government would typically like to bring in. But then these are extraordinary times and the government has shown it’s willing to do all sorts of things which aren’t compatible with traditional Tory values of fiscal caution and light-touch government. Allegiance to lower taxation is also likely to prove a casualty of the pandemic.

“Looking at just how much money the government needs to recoup as a result of coronavirus, CGT is likely to be the thin end of the wedge, because it won’t balance the books on its own. Pfizer’s vaccine has given us a glimpse of life after the pandemic, but along with that hopeful outlook, we should prepare for tax rises too.”