Budget predictions, part one: Spotlight on capital gains tax

15 February 2021
3 min read
Published:

In the first of his series of blogs about the upcoming budget, Michael Lansdell discusses possible changes to capital gains tax.

March 3 is when Rishi Sunak will deliver his budget. His last, presented on March 11, 2020, was delivered as every business owner across the UK was starting to worry about what was to come.

A year on and with borrowing having hit a record high to fund coronavirus support measures, we know the chancellor has to balance the books to stop debt spinning out of control.

So, tax rises, then? If you’re resigned to the inevitable, there have been whispers that no decision has been taken (yet). Of course, the government did pledge not to increase rates of income tax, VAT or NICs during this parliament. Will Mr Sunak stick to this? They do bring in a lot of revenue…

Also added to the mix, and maybe giving him some ideas, will be the cross-party select committee’s review of ‘tax after coronavirus’ possibly due to report back before March 3.

Over the next few weeks, we’re going to look at what could be in the budget, starting with changes to capital gains tax (CGT). If there are no rises to the rate of income tax, VAT or NICs, CGT is next on the list, which is why it’s worth considering what impact it could have on you, as a business owner and/or higher rate taxpayer.

CGT, under review for a while
The Office for Tax Simplification (OTS) was previously tasked with reviewing CGT. Last November, when it reported back, it set out a framework of policies for consideration.

There are currently four rates of CGT – is a flat rate on the cards? It would be simpler, but would it be fair? With CGT rates lower than income tax rates, taxpayers are currently encouraged to seek a return that is taxable as a capital gain, rather than an income. Is this a ‘distortion’ as the OTS says, or does this actually encourage investment, at a key time for our economy?

If the government wants to address a ‘distortion’, the OTS suggested it could align CGT more closely with income tax rates (at the risk of taxpayers holding on to their assets, rather than selling any that have appreciated). If it doesn’t want to address it, the OTS report said the system could be simplified by not only reducing the number of GCT rates, but also the extent to which any liabilities depend on income. The OTS also identified that shares and securities as remuneration might be an area where income tax could apply, to stop abuse of the system. Will the chancellor explore any of these options? Time will tell.

The annual exemption and business reliefs
The current CGT annual exemption is £12,300; HMRC’s statistics indicate that every year, many investors sell some of their assets to “use up” this £12,300 – almost £25k per couple per year – as a form of tax relief. The OTS recommended a scaling back of the CGT annual exemption to between £2k and £4k, this could potentially change as soon as the budget on March 3.

In the last budget, all business owners faced a big change with the replacement of entrepreneurs’ relief with the less-valuable business asset disposal relief (BADR). The OTS report proposed that BADR should be closely targeted to apply to retirement scenarios – so further restrictions, or a scrapping altogether, of the 10 per cent rate of CGT on the sale of your business may be on the cards in the coming weeks.

How important is the OTS report?
If we’re looking for clues about changes to CGT in the budget, the OTS report was routine and these are suggestions. Ultimately, CGT reform is a political choice for the government of the day – and perhaps a really hard sell in already challenging times.

On the other hand, who knows, when we have seen how quickly things can change! If you need any advice about CGT, give the friendly, knowledgeable team at Figurit a call. We don’t have a crystal ball, but we can offer support and guidance based on our years of experience helping people optimise their business and personal finances. And be sure to keep reading this blog, too, where we’ll be making other predictions, as well as covering topics for business owners who, though things might look tough, want to keep on thriving.

For more information visit https://figurit.com/uk/dental-tax-accountant/