Tax opportunity?

So here we go, as predicted in our previous blog here, the tax rises are coming.

The first one looks likely to be Capital Gains Tax (CGT) with this letter from the chancellor Rishi Sunak to the Office for Tax Simplification firing the starting pistol.

His request is for them to look at several aspects of this tax including whether the rate of tax should be linked to the rate of Income Tax, use of allowances, use of reliefs and use of losses. It would not make sense for the annual allowance to be meaningfully adjusted downards as it would just generate a lot of extra work for HMRC, processing small gains for very little tax. Restricting the period losses can be carried forward would also be tricky, as these are genuine past losses for most people and it may take years to accumulate gains to offset. The most likely change would be an increase in the rate of CGT charged.

CGT was introduced in 1965 and for most of its life has been charged at a rate linked to the rate of income tax, so 20% for basic rate taxpayers and 40% for higher rate taxpayers at the current rates. This is twice the current rates of 10% and 20% CGT (18% and 28% for property) which were introduced by Alistair Darling a decade ago.

A doubling of rates gives rise to an interesting choice for our clients. It can be seen as a huge increase in tax, probably from next tax year. It could also be seen as an opportunity to realise investment gains at a very low rate of tax.

To raise a gain this tax year and pay this advantageous rate of tax you need to change the ownership of all or part of the asset you have liable to CGT. Second properties are the most obvious asset where this issue arises. For a property the options are to sell, gift to someone other than your spouse or gift to a trust. For larger properties this could be a partial transfer.

The same choices exist for shares, funds and general investment accounts which are all liable to CGT on gains. Investments tend to be more flexible when it comes to the options for gifting.

It is important not to realise all gains this tax year if you can hold onto some and encash them within your CGT exempt annual allowance (currently £12,300) in future tax years. In reality, future gains may use up these annual allowances if the asset is large enough and therefore it might makw sense to fully encash in the current tax year.

There are more complex options for CGT mitigation. One exercise we have been taking clients through recently is to transfer assets into trust and back out again to beneficiaries. Holdover relief can be claimed on entry and exit of the trust which passes both the asset and the gain onto the beneficiaries (often children to further avoid tax in the form of inheritance tax IHT). This works really well where you have multiple individuals with multiple CGT annual allowances and sometimes lower income/CGT rates.

It remains to be seen what further tax increases will come but we expect that a Wealth Tax might be on the cards. The problem with this is that we don’t know what form that tax will take and so a close eye needs to be kept on the Treasury and Mr Sunak.

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