Proposed changes to the capital gains tax

On Wednesday, 11 November the government-run office presented its review on the capital gains tax (CGT) reform as one of the ways of covering the increasing costs of COVID-19.

Typically, CGT is levied on the profits (gain) from selling or disposing of the owned assets, for example second homes or shares.

According to the report commissioned by the Chancellor, the proposed changes will allow the Government to raise nearly £14bn through reconsidering the CGT rates and reliefs.   

In more details, the main recommendation of the tax report is to align the CGT rates with the income tax rates, namely to double the CGTs current basic rate 10% and higher rate 20% up to the income tax levels, i.e. 20% and 40/45%. In additional, the report suggests taxing the share-based rewards of employees and owner-managers under the income tax rates.     

Another reform advised by the tax office is to shorten the list of exemptions for CGT, for example to remove the annual allowance of £12,300 free of tax.

Currently, the UK taxpayers do not need to pay CGT on the property which is considered as the individual’s principal residence, personal possessions worth less than £6,000, private motor cars, including vintage cars, gifts to UK registered charities, some government securities and if the net gains on the taxable assets are below the annual allowance in the tax year. To find the new source of the tax revenue, the Government is advised to reduce the annual exempt amount from the current £12,300 to either £6,000 or £2,500. This will generate £480 million and £835 million in additional tax revenues, respectively, according to the estimations.

Another potential change may affect the inheritance tax policy - as the tax officers state, a taxpayer should not be awarded both inheritance tax exemption and a capital gains tax death uplift. As a result, it is recommended to remove the Capital Gains Tax death uplift where the inheritance tax relief applies. 

The report is also targeted to remove the investor’s relief announced in 2016 to support unlisted companies in attracting additional capital. The individual could apply 10% of CGT on the sale of the shares in the unlisted companies if the shares are held at least 3 years with the lifetime threshold of £10 million. Based on the survey of the tax office, the given relief is unpopular indicating that only 5% of the respondents would use it and therefore, could be removed.

Now, these are one of the principal changes recommended to the Government to consider but not yet implemented until authorised by the Parliament.