Ross Coombes, Financial Planning Director – Investec Wealth & Investment – firstname.lastname@example.org
If we learned one thing in 2020 it is that nothing is certain, and that’s true of a potential tax change rumoured to be landing in 2021. The government need to foot the bill for the significant economic fallout of the Covid-19 pandemic somehow, so it’s hardly surprising that members of the Treasury select committee are now considering changes to capital taxation.
If enacted, these changes will have a material impact on business leaders, higher rate taxpayers and investors alike.
While nothing is a given, this article explores what the possible changes could mean for you at a high level.
What are the potential changes to the CGT allowance and CGT rates?
The current CGT rates are 10% for basic rate tax payers and 20% for higher rate and additional rate tax payers (18% and 28% respectively on second properties). The proposed changes include adjusting CGT rates in line with income tax rates, which currently stand at 20%, 40% and 45% for basic, higher and additional rate taxpayers respectively.
Currently, you can realise gains of up to £12,300 within your CGT allowance and therefore no tax is paid on that element. It is suggested that this reduces to between £2,000 and £4,000.
In very simple terms, it is possible that:
Less of your gains will be free from tax
The taxable gains you do have are likely to incur tax at a higher rate than at present
What this could mean for investors
Over the years, many of our clients have accumulated significant gains within their taxable investment portfolios. Whilst tax wrappers such as ISAs, SIPPs and offshore bonds have been widely used to shelter investments from tax, many clients still have taxable investments; therefore tax changes present significant challenges and are something that should be carefully considered and discussed.
What are the potential changes to CGT on death?
Most assets inherited following someone’s death are received with a deemed value paid as the value at the date of death rather than what was actually paid when the item was bought. A subsequent sale would therefore see CGT calculated based on the current value minus the value at the date of death (and any other allowable deductions). The new recommendations would see CGT payable based on the original purchase cost, not an uplifted basis.
What might business leaders need to think about in advance of any changes?
In April 2020, Entrepreneurs’ Relief (ER), which enabled company owners to pay CGT at a lower rate when selling their businesses (subject to meeting qualifying conditions), was replaced by Business Asset Disposal Relief (BADR). Previously sellers qualifying for ER within the higher or additional tax brackets paid a reduced rate of 10% on lifetime gains of up to £10 million, compared with the standard CGT rate of 20%. But BADR means such business owners now pay 20% CGT on anything above £1 million. As a result, it’s now less financially attractive for clients to sell their business to meet cash flow requirements, so borrowing may prove an alternative source of cash flow.
How could changes to CGT affect the world of property?
The rate of CGT payable on residential property (excluding primary residence) for higher and additional rate taxpayers is currently 28%. Clearly if this is brought closer to income tax levels, savvy property investors may be less inclined to sell and see financial benefits in releasing equity by borrowing against their property portfolios, making buy-to-let mortgages and solutions with higher LTVs attractive options.
Is it time to think differently?
Of course, it is not suggested that wholesale changes should necessarily be made on the basis of these proposed changes, which are not guaranteed to take effect. However, for those with significant embedded capital gains within their taxable portfolios, those intending to pass on their investment portfolios to future generations, or those considering selling their business or buy-to-let properties these changes may have a considerable impact in future tax years.
We would be delighted to help with these discussions and will endeavour to add value to your circumstances to ensure your affairs are as efficient as possible in these changing times.
This article is for general information purposes only and any reference to Tax should not be used or relied upon as professional advice. It is based on regulations in effect at the time of publication and no liability can be accepted for any errors or omissions, nor for any loss or damage arising from reliance upon any information herein. It is advisable to contact a professional advisor if you need further advice or assistance as the tax implications can vary depending on an individual’s personal circumstances and may be subject to change in the future.