The Chancellor writes to the OTS to commission a review of Capital Gains Tax
The Chancellor, Rishi Sunak, has written to the Office of Tax Simplification to request a review of Capital Gains Tax (CGT) and aspects of the taxation of chargeable gains in relation to individuals and smaller businesses. This surprise step suggests the Chancellor is looking at options to increase the currently low rates of CGT as part of his Autumn budget later this year: https://bit.ly/3j8emvQ
The request follows a report by the Office for Budget Responsibility that highlighted government spending was likely to exceed £350bn this year due to the spiralling costs of protecting businesses and households during the ongoing Covid-19 pandemic.
Currently, the first £12,300 of capital gains are tax-free thanks to the CGT annual exemption, similar to the current Income Tax Personal Allowance. Gains above the exemption threshold are taxed at just 10% (to the extent the gain falls within any unused basic rate band for Income Tax purposes) or 20% (higher rate). CGT rates are higher for the sale of residential property, at 18% and 28% respectively.
The gap between CGT and Income Tax rates has been cause of much controversy over recent years, with concern that wealthier taxpayers are able to arrange their affairs in order to pay lower overall tax rates than those on lower incomes, by tapping into the generous CGT rates. Increasing the rates of CGT would be an easy win for the government, as it would certainly provide a much needed boost to their coffers, but would also done under the guise of tax simplification.
Whilst such a move will be unpopular among those with accumulated wealth, increasing CGT rates may be of more general appeal to voters than alternative tax increases that place more of the tax burden on lower income households.
If CGT rates were changed in the Autumn budget it remains to be seen whether it would take immediate effect or come into force from April 2021. We have seen in-year CGT rate changes before so changes from budget day would not be a surprise.