Review of Capital Gains Tax – what it means for small businesses and individuals
The Government announced on 14 July 2020 that Capital Gains Tax, as it applies to individuals and small businesses was to be reviewed by the Office of Tax Simplification.
The backdrop to this is, of course, the Covid-19 pandemic and public spending that this has caused in seeking to keep the UK economy on life support.
The perceived issue and problem for the Government is that public spending must be paid for, yet in the current environment, tax rises are particularly difficult: most taxing decisions have impact on the behaviour of taxpayers.
In some cases, tax raises are designed to seek to create behavioural changes, such as for example increasing duties on tobacco or alcohol, so called sin taxes, yet increases in the major raisers of revenue for HM Treasury: Income Tax (forecast at £208bn), VAT (forecast at £161bn) and National Insurance (forecast at £150bn) all would impact on aspects of the economy that are febrile: the economic impact of the coronavirus has been to impact on demand and supply within the economy, together with a significant risk of high levels of unemployment as the Government’s employment and business support packages are phased out.
This leaves the Government scrabbling for other sources from which revenue may be raised, without impacting the elements of the economy that need protecting. Further, taxation is, of course, a deeply political matter and any Government will be concerned to ensure that whatever is done from a taxation viewpoint does not alienate voters that are within its potential grasp.
There are, however, two competing points regarding the politics of tax rises: on the one hand, we are still early in the current parliamentary term and generally Government behaviour is to raise taxes in the early years and announce give-aways as one approaches an election, but on the other, the current Government will be looking over its shoulder at the possible re-emergence of what might be perceived by voters to be a credible Labour party. This, it is suggested is the context in which Capital Gains Tax and capital taxation generally is being looked at.
CGT has always been a political football but equally, quite unimportant in terms of the revenue that it raises: £8.8bn was raised in the 2017/18 tax year (Inheritance tax only raised £5.228bn for that year). When taxes are changed, there is a tendency for Governments to adopt a ‘back to the future’ mentality and therefore it is perhaps worth seeing where we have come from in order to predict what might come to pass.
For a number of years, until 1988, CGT had been charged at a flat rate of 30%. From 1988 until 2008, gains were taxed at income tax rates, but with taper relief reducing the gain between 1998 and 2008. In 2008, a flat rate of 18% was introduced. This was then again changed from 2010 so that gains were generally taxed at 18% for basic rate income taxpayers and 28% for higher rate taxpayers. This was then reduced from 2016 for non-residential property gains to 20% or 10% for basic rate taxpayers, the system we have to this day.
Yet the tax base for both CGT and IHT is very small. Fewer than 300,000 people paid CGT in 2017/18. For IHT, the base is smaller still: for 2016/17, there were only about 28,000 deaths on which IHT was paid (4.6% of deaths for the year). Increases in tax rates for CGT and IHT will not increase the tax base and generally, the way in which significant revenue increases are achieved is widening the base rather than increasing the rate.
For the reasons set out above, whilst the ambit of the instruction to the OTS is to review of Capital Gains Tax and aspects of the taxation of chargeable gains, there is every reason to believe that CGT will be looked at (together with IHT) from a viewpoint of widening the base so as to increase revenue.
It would be entirely unsurprising for some sacred cows to be slaughtered to achieve this, for example, the tax breaks provided in respect of your main residence, tax breaks for ISA’s etc. From an IHT viewpoint, the reliefs that are provided in relation to business and agricultural assets must be potentially within the Government’s sights together with how capital taxes interact, for example, the CGT uplift of assets to their market value at death, even where there is no IHT payable must be called into question.
The taxation holy grail of any chancellor faced with the need to raise taxes in current circumstances must be to raise taxes without impacting employment and with minimal impact on the supply and demand aspects of the economy. The “simplification” of capital taxes linked to a broadened tax base will surely be too tempting.
We are left in the situation where a budget is expected in November. This might be too early for major reforms, however, for those looking for certainty there is a certain attraction to act now to “bank” the current system, by acting now where there is every reason to believe that capital taxation will not be getting better any time soon.
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To discuss how this Capital Gains Tax review may affect your current or future plans, please get in contact with David Bennett.