Following a months-long review of capital gains tax (CGT), the Office of Tax Simplification (OTS) published a report in November advising reforms to the current regime that will likely increase the amount paid by millions of taxpayers. Before these reforms are agreed and enacted, it’s wise for investors to review their portfolios and CGT liability and take action to protect their wealth.

What is capital gains tax?

CGT is a tax levied on the profit made when certain items or assets are sold, where this is above the annual tax-free allowance (£12,300 in 2020/21). This includes the sale of second homes, shares and investment funds, and collective investments such as open-ended investment companies (OEICs) and unit trusts. The rate charged depends on the cumulative value of assets sold within a tax year and the seller’s tax position (whether they are a basic or higher rate taxpayer).

What is the capital gains tax review?

Earlier this year, Chancellor Rishi Sunak commissioned a review of the CGT regime, asking the OTS to consider the overall scope of the tax and the rates which apply, as well as the reliefs, exemptions and allowances that are currently available. The result of this review was a report published in November.

What recommendations were made in the report?

One recommendation made in the report is to align CGT rates with income tax rates. There is currently a vast difference in the rates of CGT and income tax.

Another proposal is to reduce the CGT annual allowance and consider removing the ‘uplift on death’. As a general rule, there is no CGT charge upon death, this is often referred to as a CGT uplift on death and effectively resets the clock on gains for CGT purposes.

What does this mean for investors?

If the tax reform proceeds, CGT rates could increase significantly, leading to higher tax bills for investors on gains made on securities held outside tax-efficient investment wrappers.

Capital gains made within ISAs and pensions are free from CGT. Investment bonds, particularly those held offshore, may become more attractive given their particular tax advantages. Therefore, it makes sense to make as much use of these valuable allowances and to ensure your funds are held in the most tax-efficient manner.

Although it is not guaranteed these reforms will take place now is still a sensible time for investors to review their investment portfolios. Many clients have assets they hold outside of tax-efficient wrappers and this would benefit from a review. Professional financial planning can help you minimise any tax liability on your investments and would prepare you well for any additional taxation that could be created should the proposed reforms take place.

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