Capital Gains Tax could be increased to help repay the billions borrowed by the Government amid the coronavirus pandemic. A report commissioned by the Chancellor of the Exchequer Rishi Sunak said the Treasury could raise £14 billion by increasing Capital Gains Tax rates. But what exactly is Capital Gains Tax and how could it be changed?
What is Capital Gains Tax?
Capital Gains Tax is a tax on the profit made when you sell or dispose of an asset which has increased in value.
The amount made on that sale is taxed, not the amount of money you receive.
For instance, if you purchase an antique worth £5,000 but it is later sold for £25,000, you made a gain of £20,000.
How is Capital Gains Tax going to change?
Mr Sunak commissioned a review of Capital Gains Tax in July in a bid to plug the economic hole created by the coronavirus crisis.
On Wednesday, OTS published a highly anticipated report into Capital Gains Tax which concluded the current rules were “counterintuitive” and created “odd incentives” in several areas.
The recommendations from independent tax adviser the Office of Tax Simplification (OTS) could raise more than £18 billion a year.
Those hardest hit by the proposals will be wealthy individuals who hold second homes or assets outside tax-favoured products.
If the new measures are implemented, the proposals will also hit owner-directors of small companies who often hold cash within their businesses for use as a pension when they retire.
Capital Gains Tax is expected to be brought in line with current income tax rates.
This “relatively high level” of Capital Gains Tax annual exemption, which is £12,300 is the main incentive for taxpayers to change their behaviour to reduce their tax bill, according to the OTS.
The OTS recommends the Government considered reducing the £12,300 allowance to between £2,000 and £4,000.
Undertaking this move would double the current rates equating to 10 percent for basic-rate taxpayers and 20 percent for higher-rate taxpayers.
The independent tax adviser also suggested scrapping the rule which enables Capital Gains Tax to be wiped on inherited assets.
The body also recommended removing relief for investors selling shares in unlisted companies, if they have owned them for a minimum of three years.
Mr Sunak commissioned the report in July, but he is not compelled to accept its findings.
A spokesperson for the Treasury said: “The government’s priority right now is supporting jobs and the economy.
“We thank the OTS for their independent report which will be considered in due course.”
Mark Heppell, Corporate Partner at JMW Solicitors, said: “While this doesn’t come as a surprise, the possibility of CGT changes will be particularly alarming to anyone looking to sell their business in the near future and those who are starting to think about succession options – I expect that a good number of those people will now be considering accelerating their plans.
“A change to the current CGT rules could well see a spate of early exits as entrepreneurs seek to avoid incurring higher taxes.
“We’re also likely to see the number of businesses becoming employee-owned increasing – it’s a tax-efficient exit strategy and the swift process will continue to be very attractive given the impending changes.”