Well the Chancellor has to pay for this year’s spending spree somehow……
On the 13th, Mr Sunak wrote to the Office of Tax Simplification (OTS) asking their team to review, identify and offer advice about opportunities to simplify the taxation of chargeable gains.
Mr Sunak went on to say that they …….” should 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, I would be interested in any proposals from the OTS on the regime of allowances, exemptions, reliefs and the treatment of losses within Capital Gains Tax (CGT), and the interactions of how gains are taxed compared to other types of income.”
The OTS duly complied by opening a consultation on the 14th, setting a deadline for responses of the 12th of October. The link below invites you to respond.
Currently (2020/21 tax year), for individuals, the annual exemption is set at £12,300 i.e. you can generate this level of capital gain without paying tax. Any capital gains in excess of the exemption are then aggregated with income, with any element falling within the basic rate band being subject to 10% and those above the higher rate threshold, 20% (18% and 28% for residential properties). There are also assets which attract a set capital gains tax (CGT) rate irrespective of income levels. Compare this with the maximum income tax rate of 45%; you can see why some individuals pursue growth rather than income.
A capital gain is made up of, the sales proceeds (less costs of sale); less the original cost (plus costs of acquisition and enhancement costs). Historically an indexation allowance increased the asset cost by inflationary rates, but this was paused for individuals in April 1998, disappearing altogether without notice in April 2008. The company indexation allowance was paused in December 2017 and will no doubt follow the same path as for individuals in due course (get in touch if you are also concerned about this).
If you have held assets for a number of years, been thinking about your future intentions and you are concerned about Mr Sunak’s intentions behind his OTS request, what should you do?
- Make the sale as soon as possible, with the known low capital gains tax (CGT) rates.
- If you hold assets which are pregnant with losses, bank them now to either utilise against capital gains or to be carried forward.
- Make the most of your ISA and pension allowance where gains are exempt.
- Utilise gift relief elections which look to transfer the inherent gain to the recipient. There are two key reliefs; one for business assets and the other when assets are transferred into trust.
- Make the most of spousal transfers, which are neutral for tax purposes (divorce lawyers do not like this one!).
- Incorporate your business and pay the tax rather than defer with incorporation relief.
- If you are considering a future company sale, making the trading company a subsidiary with the intention of selling just the subsidiary company, will likely trigger the availability of a company exemption. The problem being that the funds (albeit tax-free) are trapped in the holding company. This may still be palatable if you have used your business asset disposal relief lifetime allowance, intend to re-invest the proceeds, can extract the value slowly at low income tax rates, happy to wait for tax rates to change before liquidating or have other family or trustee shareholders in place to benefit.
I should point out that a number of OTS recommendations have not yet been acted upon, whether due to time, or political/ economic circumstances. Indeed if you have no intention of selling the investment in the next ten years, no doubt there will be a couple of changes to the capital gains tax (CGT) regime in that time, so you may prefer to hold your nerve!
There are also currently various mechanisms to defer/exempt gains (e.g. EIS/SEIS, rollover relief, social investment relief), or reduce the tax rate charged on the gain (e.g. personal pension contributions, charitable donations), should the capital gains tax rates align with income tax at a later date.
These are just a few ideas, you should however never let tax dictate your commercial/personal decisions; as usual please do talk with your AG adviser for personalised advice.