What changes to Capital Gains Tax could mean for you
On the 3rd of March 2021, the Chancellor of the Exchequer, Rishi Sunak, is set to publish the first budget announcement of the year. There has been a lot of speculation that, amongst other updates, the UK may see changes to Capital Gains Tax (CGT).
The most common predictions around this suggest that increases in CGT could be one method for the government to begin recouping stimulus funding. Of course, we can’t know for certain what the budget will hold until the announcement is made. It is important, however, to be as prepared as possible in case there are changes that come into effect before the end of the tax year.
What Is Capital gains tax?
Capital Gains Tax is the tax on the profit you gain when you sell, or otherwise dispose of, an asset that has increased in value. Certain assets can be sold tax-free and there is a tax-free allowance for Capital Gains Tax. For more information on what that might look like, you can check the government website. You may also want to speak to your adviser about your specific situation.
Likely changes to CGT
Although the changes have yet to be announced, we can make logical predictions based on recommendations from official, independent organisations like the Office of Tax Simplification. This organisation works to make the taxation system as clear and easy to navigate as possible for taxpayers and provides advice to the government.
Recommendations from the Office of Tax Simplification with regard to Capital Gains Tax:
There should be a greater alignment between capital gains and income tax rates.
Business Asset Disposal, previously called Entrepreneurs’ Relief, has been identified as something that should be removed after being reduced to just £1 million in the most recent budget.
A huge reduction in the level of annual capital gains exemption, to as low as £3,000 per individual.
Abolish Investors’ Relief, which is a scheme designed to reduce the amount of Capital Gains Tax on shares that aren’t listed on the stock exchange.
Reducing the amount that employees can benefit from capital gains from the shares that they are given by the company they work for.
While these recommendations don’t show specific actions that the government may take with regard to CGT, they do showcase that this type of taxation is already ripe for reform. This correlates with current speculation that Capital Gains Tax will change.
The government has many options for how to make these changes, from increasing tax rates to limiting exemptions.
Specifics are as yet unknown until the budget announcement, but it would be prudent for individuals to prepare themselves and their tax strategies.
What you can do to reduce your risk
In order to be better prepared for any changes that may occur, there are several actions that you can take. Before committing to any of these actions or altering your tax plan, make sure that you do research and speak to an adviser who can help you create a strategy that works in line with your individual situation.
To help kick-start your thinking, however, here are some of the options you may have available to you:
Take advantage of the current CGT rates by bringing forward a sale or disposal of your assets
Consider offshore structures for holding retained profits and/or other investment.
Consider the use of Employee Ownership Trusts; disposal of shares may be exempt from CGT
Transfer assets to your spouse before a disposal to make the most of both of your CGT allowances
Utilise any capital losses
Stagger disposals to use up annual exemptions in different tax years rather than disposing of assets all at once
Defer capital gains using EIS investments (perhaps only after the new changes come into force) or exempting gains using SEIS investments
Delay disposals if the CGT rates equal the income tax rates in order to try and take advantage of lower rates in the future
While we can’t know for certain what changes will be put in place until the announcement in March, there are still many ways to prepare during this pre-budget period. If you are at all concerned about how potential changes to Capital Gains Tax might affect you, consider speaking to a professional tax adviser or planner.