Capital gains tax planning

05 Jan 2021

Gains today, gone tomorrow?

David Bowen

David Bowen

Financial Planning Director

What to expect from a capital gains tax regime overhaul

This month, the Office of Tax Simplification (OTS) released a new report on capital gains tax (CGT), following a months-long review requested by Chancellor Rishi Sunak. As expected, the report recommends an overhaul of the current CGT regime, which could affect millions of taxpayers. Let’s examine the reasoning and implications.

The capital gains tax disparity

There is no doubt that CGT rates are at historical lows, certainly when considered in relation to income tax. For example, a higher rate taxpayer faces income tax at rates of 40% (41% in Scotland) on income between £50,001 (£43,431 in Scotland) and £150,000 this tax year, and rates of 45% (46% in Scotland) on income above this level.

 

In comparison, capital gains that exceed an individual’s personal allowance (£12,300 in the 2020/21 tax year) are taxed at a maximum rate of 20% (or 28% for residential property). It is this disparity that the review aimed to address.

Inevitable changes to this system

The results of the OTS review should therefore come as no surprise. This month’s report stated that the current disparity in rates distorts taxpayers’ decision making and incentivises certain arrangements of their personal finances. Some contributors argued that this creates a barrier to economic growth and equitable society.  

In a time of ever-increasing public spending, and thus government borrowing, changes to the CGT regime feel inevitable, whether this is an increase in rates to sit in line with income tax, a reduction in the CGT allowance, or both.  Perhaps the two most relevant conundrums really facing investors are by how much this regime will change, and when.

Planning to get ahead of these changes

We can discuss these questions (at social distance, of course) and what action can be taken at length. Despite the headlines, there are some sectors of the market, both in the UK and globally, that sit higher than they did pre-pandemic and therefore gains are available to be realised from a well-managed portfolio. The cost and benefit of taking these gains now, and the resulting tax bills, should be examined with your financial planner or investment manager.  
 
In the future, the attraction of unwrapped investments diminishes in a stricter CGT regime, and it becomes more important than ever to not only consider your tax-free allowances (such as pension and ISA, where available) but also other areas of tax planning. There are other mainstream tax wrappers than can shelter income and capital gains from tax and your options must be considered in full. 

If you wish to discuss any of these points further, then please do contact your usual financial planner or investment manager, or your local Investec Wealth & Investment office.

About the author

To contact or read more about David Bowen, visit his biography here.

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