What could proposed changes to capital gains tax (CGT) mean for your clients?

07 Dec 2020

Digital Content Team

Investec

Important tax planning opportunities may exist before the end of the current tax year – we are here to help

 

Intended for Financial Advisers only.

They say that “nothing is certain but death and taxes” - but a year defined by uncertainty has proven that even this rule can be broken. The outlook for the capital gains tax regime is currently far from certain, with potential changes rumoured to be landing in 2021. 
 
Following the first of two reports from the Office of Tax Simplification (OTS) at the request of Chancellor Rishi Sunak (with the second likely to follow early next year), it appears that sweeping changes are being considered, as the government seeks to stabilise public finances in the wake of the significant economic fallout of the Covid-19 pandemic. If enacted, these changes will have a material impact on business leaders, higher rate taxpayers, and investors alike.
 
While these changes are unconfirmed, this article explores what they could mean for your clients at a high level. With your guidance, and/or the help of a tax specialist, clients can further understand how these changes may affect their financial position. 

Potential changes to the CGT allowance and rates

The current CGT rates are 10% for basic rate taxpayers and 20% for higher rate and additional rate taxpayers (18% and 28% respectively on second properties).
 
The proposed changes include adjusting CGT rates in line with income tax rates, which currently stand at 20%, 40%, and 45% for basic, higher, and additional rate taxpayers respectively.
 
With regards to the personal allowance, you can currently realise gains of up to £12,300 without paying tax on this element. It has been proposed that this allowance be reduced to between £2,000 and £4,000.
 
In very simple terms, it is possible that:   
      
  • Less of your clients’ capital gains will be free from tax
  • Their taxable gains are likely to incur tax at a higher rate than at present
 
Notably, these proposed changes may also impact trusts, which could have a much-reduced allowance and higher tax rates on chargeable gains in excess of this.

20%

Current CGT rate for additional rate payers

£2,000-£4,000

Potential new Capital Gains Tax allowance

45%

Current income tax rate for additional tax payers

How these changes affect your clients

Whilst tax wrappers such as ISAs, SIPPs, and offshore bonds have been widely used to shelter investments from tax, many clients still have taxable investments and, over the years, they may have accumulated significant gains within their general investment accounts.
 
Therefore, tax changes present significant challenges and are something that should be carefully considered and discussed.

Example: CGT payable on an investment for a higher rate tax payer

Under current rules:

  • Asset value: £200,000
  • Capital gain: £100,000
  • CGT allowance: £12,300
  • CGT payable: £17,540 - with CGT as 20% on £87,700

This would then be taxable at 20% and therefore cost them £17,540.

Under proposed new rules:

  • Asset value: £200,000
  • Capital gain: £100,000
  • CGT allowance: estimated £3,000*
  • CGT payable: £38,800 - with CGT at 40% on £97,000

This represents a significant potential tax increase of £21,260.

 

*the average of the proposed figures which are speculated but not confirmed

Potential changes to CGT uplift on death

For most assets inherited following someone’s death, the value for CGT purposes is rebased to probate value, which is referred to as an uplift on death. A subsequent sale would therefore see CGT calculated only on any gain since the date of death. 
 
The new recommendations would see CGT payable based on the deceased’s original purchase cost, not an uplifted basis.

Example: CGT payable on the sale of an inherited asset

Under current rules:

  • Inherited Value: £200,000
  • Cost to original purchaser: £100,000 – deemed irrelevant currently
  • CGT uplifted value on death: £200,000 

CGT would not be payable on an immediate sale on this as no gain is present – for example to raise funds to meet the inheritance tax due on the estate.  

Under proposed new rules:

  • Inherited Value: £200,000
  • Cost to original purchaser: £100,000 – now very relevant 
  • No CGT uplifted Value 

CGT Calculation £200,000 - £100,000 = £100,000, as a result of gain on an immediate sale

 

This gain would use any available CGT allowance and then be taxed. If the higher rate taxpayer has already used their CGT allowance, this would equate to a potential £40,000 CGT charge or could even see them go into the additional rate tax band and suffer 45% tax on all or part of this payment.
 
This therefore represents a significant tax increase of at least £40,000. 

Clients most likely to be affected

There are a wide range of scenarios in which clients could be affected, including:
 
  • Clients with significant embedded capital gains
  • Clients with large taxable portfolios
  • Clients who are higher or additional rate taxpayers
  • Clients who are basic rate taxpayers, where additional capital gains may push them into a higher rate tax bracket for CGT purposes
  • Trust portfolios with significant embedded gains
  • Clients with taxable portfolios that undertake automated rebalancing without, for example, trying to use spousal transfers to mitigate potential gains or accumulated losses
  • Clients who require income and/or withdrawals from taxable portfolios to fund their lifestyles
  • Clients who also possess property assets on which it is likely gains will arise and should be assessed alongside their other assets   
  • Clients who use multiple investment managers and/or self-manage some of their investments
  • Clients who have large single-stock positions with embedded capital gains
  • Clients who are intending to leave assets with significant capital gains to their beneficiaries on death 

Tax planning opportunities for your clients

Of course, it is not suggested that wholesale changes should necessarily be made on the basis of these proposals, which are not guaranteed to take effect.  However, for your clients in the above instances, these changes may have a considerable impact in future tax years and we would be delighted to work with you and your clients to assess their exposure to these potential changes.
Disclaimer: This article is for general information purposes only and any reference to Tax should not be used or relied upon as professional advice. It is based on regulations in effect at the time of publication and no liability can be accepted for any errors or omissions, nor for any loss or damage arising from reliance upon any information herein. It is advisable to contact a professional advisor if you need further advice or assistance as the tax implications can vary depending on an individual’s personal circumstances and may be subject to change in the future.

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