The Chancellor of the Exchequer has asked the Office of Tax Simplification (OTS) to undertake a review of Capital Gains Tax (CGT) including aspects of the taxation of chargeable gains in relation to individuals and smaller businesses. In a letter dated 13th July, the Chancellor asks that the review identify 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. In particular, interest is expressed “..in any proposals from the OTS on the regime of allowances, exemptions, reliefs and the treatment of losses within CGT, and the interactions of how gains are taxed compared to other types of income.”
The OTS has published an online survey and a call for evidence to seek views about CGT. This comes in two sections: the first seeks high-level comments on the principles of CGT by 10 August 2020, while the second and primary section of the document invites more detailed comments on the technical detail and practical operation of CGT by 12 October 2020.
The earlier deadline for comments on the principles of CGT could put the OTS in a position to provide an interim update on bigger picture issues. In “setting the scene” the OTS refers to the 2017/18 tax year, where chargeable gains subject to CGT after losses but before the annual exempt amount were £57.9 billion, an increase of 13%. CGT liabilities were £8.8 billion, up 14% on the previous year. The average tax rate was 15%, reflecting the impact of the annual exempt amount and the varied rates of tax. One interesting point is that over half those who pay CGT either pay no income tax or only pay at the basic rates.
What’s expected and what are the timeframes?
Commentators are speculating that CGT rates may be set to increase as part of the Government’s Covid 19 response. It will be interesting to see if the OTS opts to provide a “big picture” update after the first part of the Consultation ends in August. Not all OTS recommendations are adopted, but the likelihood of an autumn Budget soon after the end of the Consultation suggests immediate change is possible. It might be strange for CGT to be reviewed and then not adjusted in the midst of a global financial crisis.
The Chancellor’s terms of reference focus on structural matters such as exemptions, reliefs and treatment of losses. It is possible, for example, that the annual CGT exemption is reduced or eliminated. The ability to carry forward CGT losses may also end, or perhaps CGT losses will no longer be available to offset gains.
My client is considering selling assets liable to CGT. Is urgent action required?
There is no certainty that the OTS will recommend changes to the current system, nor that CGT will be adapted to raise higher amounts of tax. The autumn Budget will most likely provide the first opportunity for change, and any legislation could be effective from the day of announcement. Anti-forestalling provisions are also possible if the OTS recommends change involving an increase in tax rates. Professional advice should be taken before any action is taken.
What are the rates of CGT, and how might they change?
There are currently four separate rates of CGT. Broadly, the 18% and 28% rates apply to residential property, and the 10% and 20% rates apply to most other asset classes. These are relatively low rates in comparison to Income tax. One possibility is to align/simplify Income Tax (IT) and CGT rates, so that investors pay tax at their highest rate on disposal of assets. There is history to support this as IT and CGT rates were aligned between 1988 and 2008.
Does the OTS review affect policies issued by Lombard International Assurance?
Life assurance policies are subject to a separate taxing regime, and are not within scope of the review. The 5% tax deferred withdrawal allowance was reviewed by the OTS as recently as 2016. The Government considered the review but decided not to pursue alternative methods of taxation.
Life assurance policy gains are subject to IT, as opposed to CGT. Gains are taxed at the investors highest rate of IT, assuming the investor is UK resident for tax purposes. No “exit tax” is raised if the investor leaves the UK, and any taxable gains are mitigated by:
a) Top-Slicing relief - where, for example, the investor is a basic rate taxpayer before the gain is added to income. Investors who limit other sources of income in a particular tax year can benefit, with potential to limit tax to the basic rate, and
b) Time apportionment relief - where the investor’s taxable gain is reduced to reflect an ownership period while non-UK resident.
When is the next Budget?
No date has been announced for the autumn Budget. Last year’s Budget was held in early November.
Director – Regional Head,
Wealth Structuring Solutions
Lombard International Assurance S.A
Senior Wealth Planning Consultant
LIA Wealth Advisers Ltd