Lost Will - Lost Inheritance?
CGT is charged on the profit/increase in value on sale or gift of assets. The rates are 18%-28% on disposals of residential property and 10%-20% on other assets. There’s an annual exemption of £12,300 per taxpayer. Disposal of your main residence is tax free and “Entrepreneurs Relief” may see the first £1 million of the gain on the sale of a business charged to CGT at the lower rate of 10%.
CGT is not a big earner for the Treasury- it represents only about 1% of annual tax revenue
A minority of tax payers ever find themselves liable to pay CGT - the wealth of the majority doesn’t generally extend beyond their house, pension fund , ISA’s and our savings at the Bank/Building Society.
Though the Chancellor’s brief to the OTT may be expressed as looking at ways of “simplifying” the CGT regime, even the least cynical will assume the hidden message is to find means of increasing the annual take from CGT; we all know the Government outlay during the Covid crisis needs to be recovered somehow. Refreshing the payment structure of an existing tax is more politically palatable than introducing a new “wealth” tax – even if any CGT changes will impact primarily on those perceived as “wealthy”.
The “simple” ways of increasing CGT revenue are self-evident:
Just as now, CGT rates have, historically, been lower than income tax rates - either directly or after the application of some form of indexation allowance. For example, back in 1983, when I first qualified as a solicitor, CGT was a flat rate 30% and the top rate of income tax was 60% (plus a supplemental rate for “investment” income).
A “capital”, rather than “income”, profit is still a profit. One can see an argument being made to bring CGT rates (on sales if not on gifts) in line with income tax. An increase in rates could be achieved at a stroke; it wouldn’t require a time consuming technical overhaul of the current structure for taxing gains.
So far as exemptions are concerned, we’ve already seen the limit for Entrepreneurs’ relief reduced from £10 million to £1 million in this year’s budget. This measure was widely predicted in advance of the Budget and business sales accelerated to completion before budget day where possible.
Principal Private Residence Relief (PPR) is the number 1 exemption from CGT.
It’d be a move of exceptional political bravery for a Chancellor to repeal or water down PPR (beyond tinkering with lettings relief and the 9 months sale window) and bring two thirds of UK households into a potential charge to CGT. While there may be absolutely no essential logic to treating profit on the sale of one’s home differently from any other profit, the Chancellor will be alert to our nation’s special relationship with the concept of home ownership and an embedded, if irrational, expectation that the family home be left untroubled by taxes.
If a change to PPR is the obvious choice for reform from an arithmetical/revenue perspective, the extent of such reform will be restrained by politics and public opinion. To the extent that increasing the tax burden only on the “wealthy “ might be perceived by the wider public as generally palatable, we may see CGT only on gains over a certain threshold.
None of us can know what, if any, changes will be made to the CGT regime, nor when. I’ve never been an advocate of taking steps with no other practical or personal motive beyond an attempt to avoid the impact of possible or rumoured tax changes.
The CGT regime may well remain unchanged; conversely, rates might be increased and exemptions reduced.
But there is one certainty; the CGT regime will not be getting more benign any time soon-if ever...
Where chargeable (or potentially chargeable) gains are already contemplated, especially on gifts to mitigate IHT, it must make sense to make those gains sooner, rather than later. They’ll be safe from any increase in rates, rumoured changes to IHT on lifetime gifts and to the availability of CGT holdover relief. Even if there were no worry over possible tax changes, with property and investment values still depressed on the back of the fall-out from the Covid crisis, it would make economic sense to act now in any event.
Jim Sawer is a partner in our Private Client team. He has a broad private client practice and has advised families in the UK and overseas, including those with commercial and landed interests, for over 30 years. Clients appreciate his ability to identify the true crux of a matter promptly and his results-orientated approach to resolving private client issues in the family context.
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