Large increases to capital gains tax were trailed in the Sunday press at the end of August, leaving advisers wondering what practical advice to give to clients over the coming months.
The tax threats had all the hallmarks of the Treasury floating some serious proposals that were “due to form the centrepiece of the Budget in November”. The chancellor announced a review of CGT back in July, so we know the Treasury and HM Revenue and Customs have been considering the tax in some depth.
The Treasury may well regard CGT as low-hanging fruit because gains are taxed at much lower rates than income. The tax rate on gains (other than on residential property) is only 10 per cent to the extent they fall within the basic-rate tax band, and it is only 20 per cent if the gain falls within the higher- or additional-rate bands – a lot better than having to pay 40 per cent or 45 per cent on income.
Furthermore, the first £12,300 of net gains realised in a year are exempt. Gains on second homes and buy-to-let property are currently subject to tax rates that are 8 per cent higher – 18 per cent in the basic-rate band and 28 per cent above that.
Is Sunak’s Capital Gains Tax review overdue?
Increased taxes
The idea floated in the press was that investors should pay tax on their capital gains at the same rate as they pay on their income. Capital gains are added on top of a person’s taxable income for the year to calculate the rate(s) of tax they would incur on the gain. There’s a precedent: a Conservative chancellor, Nigel Lawson, introduced the regime for several years, back when Margaret Thatcher was prime minister.
The Labour Party at the last election was keen to reduce the £12,300 annual exempt amount, but this hasn’t figured as a proposal so far. It exists, at least in part, for administrative reasons to keep thousands of small gains out of the tax net because they would clog up the system for little extra revenue.
A key question is when the chancellor is likely to introduce an increase in CGT rates.
Most economists expect Rishi Sunak to have to increase taxes at some point to start paying off some of the huge debt that is being built up to keep the economy going during and after the pandemic.
A plausible argument could be made that an increase to CGT would probably have a minimal immediate impact on the wider economy because it hits capital. However, if the chancellor wants to start the process of increasing taxes, CGT may be the best place to begin.
Potential plans
An obvious date for an increase in CGT following an announcement in the November Budget would be the start of the next tax year on 6 April 2021. HMRC would have time to prepare; the tax is based on an annual basis and the process of actually collecting the extra tax would start 18 months later for most gains. The announcement would prompt thousands of taxpayers to realise gains at the old rates in the last few months of 2020/21, but that might provide a welcome tax windfall.
Waiting until April 2022 to introduce an increase would give investors even more time to take advantage of the old regime and would postpone the impact of the tax for a further year – uncomfortably close to the next election. Introducing the increases to be effective immediately from Budget day would be tricky although probably just about feasible.
The basic strategy for investors should be to try to realise gains before any change is introduced and to postpone realising losses until after it comes in. That way they would pay the lower rate on the gains and get more relief on the losses. But, of course, there are always special circumstances and it doesn’t do to let the tax tail wag the investment dog – investment logic is usually more important than tax logic.
It would also make sense to use the £12,300 annual exempt amount, and to invest the maximum possible in Isas.
The potential CGT rise just adds another reason – in addition to the temporary stamp duty cut – for people who are already selling their BTL property or second home to get it done before the end of the tax year to avoid the possible extra 12 per cent or 17 per cent tax on gains.
However, for investors in shares and funds, the possible extra tax on gains is actually greater – from a benign 10 or 20 per cent to 40 per cent or even 45 per cent – albeit they usually have more flexibility about how they make their disposals.
The truly pessimistic will aim to act before November. Otherwise it may be best to wait until the Budget and see what happens then.
Danby Bloch is chairman of Helm Godfrey and head of editorial strategy at Platforum
There does come a point in time when the system is so thoroughly soaked with the plethora of taxes and tax systems that raising them any further is entirely counterproductive, because it will be a disincentive at best and actually destructive at worst.
I would suggest that we hit that point some considerable time ago.
For example, we know from the previous Labour Government’s actions on Corporation tax. that increasing it actually produces less revenue, simple because corporate trading goes overseas or off-shore, or they simply invest in their own businesses rather than contribute more to the Government’s business.
I would strongly advocate that the Government has got to start the public conversation, and research where all the money is going that they already tax off us all – in that vein, we desperately need to review the entire working contract of all Public Sector employees, particularly those with salaries in excess of £100,000 per annum and their attaching pensions, all the pensions in early payment (before age 65), all pensions in payment in excess of £40,000ps , and all contractual hours of less than 40 hours per week.
Divisive it may be, but it needs to be done.
When you think about it, the goal is extremely attractive. The goal would be to eliminate the budget deficit overnight, reduce the national debt to zero (equivalent) in ten years, and re-instate the state pension for all at age 65 and a minimum £250 per week.
Beware, because the fake press will not like it, and will not support it because the Establishment will scream murder ….
One could add that the experience of far too many people trying to get any response at all from central or local government and other parts of the Public Sector allegedly working from home is that they are not working but enjoying a lengthy paid holiday because the cannot and do not access any paperwork etc in the “Office”.
Many of these were already “working from home” or “hot desking” so in reality Covid 19 is not to blame for the curent appalling “service”!
It is time for all members of the Public Sector who are not working in their “offices” and who cannot prove they are providing the same service level, however poor, as before Covid 19 should be furloughed on the now 70% of pay capped at £2,500 per month in linewith th Private Sector.
My personal experience of, for example, the Land Registry is they are a year behind and have no intention of catching up until they all return to work in their offices.
Sorry, but why will taxes have to increase?
The accepted orthodoxy is that lower taxes increase tax revenue and the last thing we need at the moment is higher taxes reducing consumer and corporate spending and throttling investment.
Would somebody remind the Chancellor of Mr Laffer & his famous curve. 40 or 45 percent tax on investment gains makes it better to keep the investment than to sell it & pay the tax. Increasing CGT won’t yield a bean extra.
You think so? Possibly for the very well off, but for those with more ‘normal assets:
1.Currently £12,300 per head tax free gain. So husband and wife £24,600 each year. Unless he reduces the allowance.
2. Most sensible people have most of their equities in ISAs and £250k upwards is not unusual – so no CGT there, unless he changes the rules.
3. Entrepreneurs relief for firms at 10% – unless this changes
4. For anyone else the deferment of taking the gain may possibly result and others may just shift assets abroad.
I may be wrong (and often am), but I really don’t see this as being much of a money spinner for HMRC.
On the other hand Amazon only paid about 2.1% of its revenue in tax last year, despite its earnings having surged by 25 per cent to £13.73 billion. I would have thought there is plenty of scope here and with the other tech giants as well. It may even help Boris’s ambition to foster UK IT as it may lead to some competition.
Morning Harry,
Increasing the tax take from Amazon and the “dot coms” is an often heard demand / suggestion – and I for one do not disagree with you.
However, it is not as simple as it first seems, because the rejoinder from these companies is that they do not retain profits and store up corporate wealth in capital assets (and pay corporation tax) in the same way as traditional older corporations. They say that they pay it out in salaries and bonuses, and the directors and employees therefore pay it in personal tax.
In my opinion there is some truth in this assertion, but there is also a lot of “profit” in the countries of origin which are not taxed and certainly should be.
Here lies the conundrum for HMR&C, along with the political one of – if we tax these guys too heavily they will move their operation somewhere else in the World – which is easily done because (yes you have guessed it) they do not own assets in those countries in the same way or quantity that the older traditional companies do.
In my opinion, HMR&C need to adopt the same strategy that they do with us normal folks and our clients. They should think up a tax bill that they estimate is about right, and then charge it to the company concerned – the onus is then on the company concerned to prove that it is wrong, and they have to pay it first whilst they are trying to prove that it is wrong. This is normal routine and practice for HMR&C and has been so for my lifetime of 50 years in business.
Of course, they will need to be careful that they do not kill the goose … as they say … which should not be beyond the wit of man.
Maybe. But this is rather off the point. I know I mentioned it in passing, but the question is – Is raising CGT as Danby suggests the best way to increase Revenue?
From what you have written it seems that you may possibly agree with me that perhaps it isn’t.
To go ‘off piste’ again, in my view the best way to tax the likes of Amazon would be to levy a percentage on turnover. If they then pass this on to suppliers it could also be to the good as it will enable traditional retailers to compete. A virtuous circle?
With regard to social media two ideas.
Firstly, outlaw anonymity. (Not for any financial reason, but to clean up the cess pit). Secondly charge a percentage on every post made. (say 0.01%)
Taxing crystallised CG’s inxs of an annual exemption threshold at the same rate as income doesn’t seem unreasonable. In fact, applying any other rate seems somewhat anomalous.
Almost every economist thinks that the Laffer curve only applies in some circumstances. If a government increases VAT or income tax by a couple of percentage points, the amount of tax collected will go up all things being equal. It’s only where those affected can do something about the tax hike that it might sometimes lead to a cut in the tax take. It might apply to a big increase in CGT rate because people affected would aim to avoid paying tax by delaying. But that depends on the implications of the action. Death is currently great CGT tax planning, but that might change. Tax rates up = tax take down is far too simplistic in my (not very) humble opinion.
And yet there have been numerous examples of reductions to tax rates increasing the tax take, notably (I seem to recall) in Hong Kong.
I’m not sure I agree that every economist thinks that the Laffer curve only applies in some circumstances. Rather, the general view seems to be that the tricky bit is finding the sweet spot, but that doesn’t mean it can’t be done.
Can’t argue with that. But at the higher end we may well end up with a wealth and brain drain that we experienced in the 1970’s. So the really well off just shift the burden to the middle- as usual.