Legal News | 25.02.21
Gift now or forever hold your peace?
The Budget takes place on 3 March 2021 and there is much speculation that, after the Chancellor’s request to the Office of Tax Simplification (OTS) in July 2020 for a review of Capital Gains Tax (CGT), there may be some changes on their way.
This, against the backdrop of high government spending during the Coronavirus pandemic, leaves a notable hole that needs to be filled and it might be increases to CGT that are used to fill it.
Current CGT rules
Under current rules each person has an Annual Exempt Amount from CGT of £12,300 and trusts have an allowance of £6,150. If a person makes a gain on the disposal of an asset (that is not their principal residence) that exceeds their personal allowance, they may be charged CGT at 10% (basic rate taxpayers) or 20% (higher rate and additional rate tax payers and trustees). If the gain is associated with residential property (i.e. second homes), CGT is charged at 18% (basic rate) or 28% (higher rate).
Proposed changes from the OTS
Realigning the rates
The OTS notes in their report, published in November 2020, that there is much disparity between the rates of CGT and Income Tax (which is charged at 20% for basic rate taxpayers, 40% for higher rate and 45% for additional rate). The OTS explains that this disparity encourages taxpayers to make arrangements which reclassify income as capital gains. The OTS has therefore recommended to the government that the rates of CGT should be brought into line with those of Income Tax.
Annual Exempt Amount
The OTS has also suggested that the Annual Exempt Amount be reduced from £12,300 to somewhere between £2,000 and £4,000 and that this could be implemented alongside a reform of the chattels exemption (which includes disposals of personal items of less than £6,000). This would mean that a greater proportion of the population could face CGT charges.
Interaction with Inheritance Tax
The OTS has proposed that where assets do not attract Inheritance Tax due to a relief or an exemption (such as business property relief or agricultural property relief), the government should remove the capital gains uplift on those assets on death. This means that people who inherit assets will inherit them Inheritance Tax free but will face higher CGT charges when/if they dispose of the asset (as they will inherit the asset at the historic base cost at which the deceased acquired the asset).
So far, none of the OTS’ recent recommendations has been implemented into policy or legislation. Furthermore, speculation states that the Chancellor is unlikely to make any big changes in the upcoming budget whilst we are still in the midst of the Coronavirus pandemic. Consequently, it could be that the increases to CGT will not happen quite yet. Either way, it is still worth bearing in mind if you are thinking about making some large gifts or asset disposals soon.
We will obviously have to wait and see what measures the Chancellor intends to introduce, but if you need any advice regarding tax planning, please do get in touch with your usual Wansbroughs contact or email email@example.com.