Get ready for changes to Capital Gains Tax & Inheritance Tax
Personal Tax Planning,
Wealth Planning & Private Client
Capital gains tax (CGT) isn’t the best known of the UK’s taxes, but it is a tax which can have a significant impact on your tax bill when disposing of an asset that’s grown in value.
With potential changes to the CGT rules being mooted in the next Budget, and the knock-on effect that this may have on your tax bill, your inheritance tax (IHT) strategy and your future tax planning, there’s a growing need to be aware of your CGT and IHT exposure, so you’re ready to take action once any changes to the CGT rules, rates and scope are introduced in 2021.
Nicola Goldsmith, looks at what the CGT changes may mean, the effect on IHT and why a proactive review of your finances and tax planning is highly advisable.
How might capital gains tax (CGT) be changing?
Most gains you make over the value of £6,000 falls within the scope of CGT. When you factor in that this covers any asset, property, shares or business asset that you dispose of, it’s easy to see how any changes to the CGT rules could have a profound impact for business owners, high net worth individuals or anyone looking to sell a property that’s grown substantially in value.
The Office of Tax Simplification (OTS) was recently approached by the Chancellor of the Exchequer, Rishi Sunak, to talk about CGT and how it might be overhauled. The aim of this OTS review , according to the Chancellor, has been to ‘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’.
So, on the whole, the key worry is around how the current CGT policy serves to affect taxpayers’ behaviour, with many taxpayers avoiding gifting during their lifetime, in order to minimise the CGT and IHT implications of such a gift. The general consensus following the review is that the Chancellor will put the rates up, which would be a sensible thing to do – historically, they are low at 10% and 20% for non-residential real estate gains.
The rates may not be brought totally in line with income tax, but they will be brought closer – and that’s going to have ramifications for many.
What will the impact of the changes be?
People will always try to turn income into a capital gain. With a 45% top income tax rate and only 20% top CGT tax rate, there’s an incentive there to turn income into a gain and to reduce your tax liability.
Any changes to the CGT rules will be aimed at bringing the rates more closely in line with income tax rates and, unavoidably, bringing in higher tax revenues to cover the cost of the Government’s Covid support over the course of 2020. The main areas of concern will be:
- Crystalising a gain – much of the recent discussion has been around gains and how these can be crystallised. So the question is whether HM Revenue & Customs (HMRC) will look at these OTS suggestions and turn them into legislation in the next Budget, due in March 2021. Any significant changes to the rules could have a large impact on your tax bill and will need to be factored into your planning.
- Selling a property – it won’t just be high-net worth individuals who will be affected by any changes, however. You could be affected if you’ve bought a property some time ago and have made a large gain over the years. The rules around declaration and payment of CGT on properties changed quite recently, but we don’t know exactly how the CGT rules may be updated and what may come into legislation next year.
- Business gains – CGT is also paid on business gains too, so any changes could affect you as a both a business owner and as an individual. There are reliefs available, and one, entrepreneur’s relief, has already recently been reduced from £10 million to £1 million and renamed to business asset disposal relief. One factor considered by the OTS as recently as last year is the interaction between inheritance tax business property relief and capital gains tax relief. The combinations of these reliefs on death mean that there’s a capital gains tax uplift and inheritance tax can also be avoided, and that’s a double relief. The OTS have already recommended abolishing the CGT uplift on death in cases where no IHT is due, so could this be a change that is being considered now?
The impact of any changes will be felt across the board. Most people seem to be focusing on whether the rates are going to change, but other changes are possible. Changes usually apply to the scope, the tax base or the rates, and whilst it appears likely that the rates may change, could the government also be considering changes to the scope or the tax base?
With rates at a relatively low amount, people are already moving to realise gains to avoid future higher tax liabilities.
What action can you take in terms of disposals?
You can't tell exactly what is going to happen in any CGT review, so it’s hard to be completely pre-emptive with any action. But you can start to review your plans and think about ways to minimise any impact. Questions to consider include:
- Are you planning to dispose of a substantial asset?
- Are you thinking of making any substantial gifts in the near future?
- Should you make this gift now, before the rules change, to start the IHT clock running, and minimise future CGT?
- Should you use a family investment company to minimise the tax impact?
- Can you survive without this asset, or is it essential to your wealth plans or business strategy?
If you have a property portfolio, a share portfolio, a business you can pass on, or you’re aiming to gift a significant asset, then you absolutely need to consider these CGT changes and be more proactive. There are going to be changes and they are unlikely to be reducing the overall CGT take.
The impact of providing Covid financial support has to be paid for, and that’s going to mean changes to tax policy. Covid has also had a highly negative effect on most owner manager’s annual income over the course of the pandemic too, so it’s worth revisiting your tax return if you did it earlier in the year, to get those numbers right and ensure that payments on account are reduced where appropriate.
It will be a long haul back to stable incomes for most of us, but the more you’re aware of your income, gains and financial management, the easier it is to plan tax-efficiently.
Talk to us about your disposals and gifts
With some form of change to the CGT rules now unavoidable, it’s vital that you take the bull by the horns and look at pre-emptive action to minimise the impact on your tax bill. Talk to your Haines Watts London partner, and get a review of your taxes, payments on account and your personal and business assets. Look at plans for the future of the business, and selling it, or making plans for your family.
In a nutshell, it’s all about minimising any due tax costs through careful and methodical tax planning. Don’t leave this until your next meeting – talk to your adviser now. We don’t know quite how things are likely to change until March 2021, when the Budget review takes place, but the more prepared you are, the faster you can take pre-emptive action.
Talk to us today and set up a review of your CGT planning.