How will the OTS review of Capital Gains Tax impact upon you?
Some of you may have heard that in the summer, the government requested a review of Capital Gains Tax (‘CGT’) from the Office of Tax Simplification (‘OTS’). What is the likely impact of that review upon your Estate Planning decisions as well as your existing and future plans to sell or transfer your business?
Since the start of the pandemic and, in particular, since the first lockdown, it became clear that this country may face a certain level of economic turmoil in the coming years. There is a gaping hole in the country’s purse and aside from the economy picking up, how on earth are the government going to make any money?
"As is usual in times of economic uncertainty, the subject of raising taxes is high on the agenda and a cause of the taxpayer’s concern."
The report published on the 11th November is the first of two planned reports and its recommendations would see huge changes to the treatment of capital gains. Whilst the government are not obliged to implement these changes, I expect some changes are nevertheless afoot if not least for the government to try and address the gap in finances.
What are OTS recommending?
The report’s recommendations to the government include:
- Reducing the current CGT allowance from £12,300 to £5,000 arguing that the current threshold is perhaps too high.
1. The proposed threshold is supposedly to be in line with the ‘de minimis’ principles thus reducing the number of people who need to file a tax return for small gains.
- More closely aligning CGT rates with income tax rates
1. Income Tax rates are currently 20% at basic rate, rising to 40 and 45%; whilst CGT rates are 10% at their lowest and only 28% at their highest.
2. However, increasing CGT rates might encourage people to hold assets in corporate structures as the rates of corporation tax are, currently, much lower than income tax rates.
- Removing the CGT uplift on death
1. Currently, a beneficiary inherits an asset from the deceased at its probate value (i.e. the value at the date of death) instead of its base cost / acquisition value.
2. Removal of the uplift is recommended particularly where there is already an inheritance tax exemption, but it is also recommended that the government consider removal of the CGT uplift on all deaths regardless of the IHT position.
3. This wouldn’t mean tax is payable on acquisition, rather that you would inherit an asset potentially laden with gain, with a tax liability then arising upon disposal.
4. The ‘base cost’ date might be limited – the OTS suggest going back to the year 2000 and no further.
The OTS also notes that current incentives encourage business owners to transfer business and personal assets on death rather than during their lifetime which may not be appropriate for the business or family - or indeed best for the wider economy.
Amendments (or even abolitions) of other reliefs – such as Investors Relief and Business Asset Disposal Relief (previously known as Entrepreneurs Relief) are also recommended.
What do I need to do?
It is important to reiterate that the government do not have to follow these recommendations. Indeed, changes to the CGT rules have been recommended for some time.
However clearly it is vital for you to be well aware of where you and your estate currently stand in relation to lifetime and death taxation. Changes in legislation could have a significant effect on wealth and estate planning going forward as well as upon plans which you might have already put in place.
Get in touch
If you have any questions or issues relating to Tax matters then please do not hesitate to contact Georgina Sinha.
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All information in this update is accurate at the time of writing. It is meant for general information only and is not legal advice.