Capital gains tax (CGT) receipts are on the rise, reaching a new record level of £9.9 billion in the last tax year according to the latest HMRC statistics.
This ongoing trend, along with rumours of rate hikes, has got some investors worried that their sales of additional property or other assets could land them with high tax charges.
We don’t think there’s cause for panic, however. With careful planning, a clear view of your tax position, and advice from an expert, you shouldn’t be met with any surprise taxes.
How does capital gains tax work?
First, let’s recap the tax itself. When you sell or give away an asset that’s increased in value since you bought it, the difference in value is classed as a ‘gain’ – and CGT may be charged.
The rates of CGT currently stand at 10% and 20% for most assets or 20% and 28% for residential property that is not your main residence, depending on your income tax rate.
You also have an annual tax-free allowance for CGT, which stands at £12,300 in the 2021/22 tax year. No tax is due on gains up to this level this year.
For instance, let’s say you bought an antique item for £1,000 and sold it for £15,000 this tax year. Your gain would be £14,000, but assuming you haven’t already used any of the £12,300 allowance, CGT would only apply to £1,700 of this (and be charged at either 10% or 20%, depending on your marginal rate).
OTS recommendations
In July 2020, Chancellor Rishi Sunak asked the Office for Tax Simplification (OTS) to review ways to streamline the CGT system.
Among other areas, he wanted the OTS to consider “how present rules can distort behaviour or do not meet their policy intent”, with a particular focus on allowances, exemptions, reliefs and losses, and the way gains are taxed compared to other types of income.
The OTS has since published two reports: one released in November 2020 looking at the design of the system, and another in May 2021 which focused on practical, technical and administrative issues.
The proposals put forward in the first report, including a suggestion that the Chancellor could consider aligning CGT rates with income tax, led to concerns the rates could significantly increase. The OTS says these have been “misread”, however, and has emphasised that it only presented the Chancellor with options to consider.
The other option proposed by the OTS, designed to avoid distorting behaviour, was to look at the boundary between what is subject to income tax and what is subject to CGT.
As yet, no decision has been announced either way on major reforms to CGT.
Perhaps more likely is that the Government will take up the OTS’s recommendations around simplifying administrative issues.
The main proposal from the second report was that HMRC should integrate the three main ways of reporting a capital gain into a new ‘single-customer account’, removing the need to fill out a self-assessment return for CGT only.
Another point to consider is the current threshold freeze on personal taxes, as the Chancellor announced in Spring Budget 2021 that the CGT tax-free allowance would remain at its current level of £12,300 up to and including the 2025/26 tax year.
This was admittedly less dramatic than the prospect of a major overhaul to tax rules and rates, but it could still bring more people into paying the tax in the next few years, especially with rising inflation.
If you’re worried about receiving a high CGT bill, there are various options to consider, which you can read about in our previous blog post – or talk to us to find out more.
Get in touch for advice on CGT.