The date of the next Budget is now set for 3 March 2021 and speculation has been growing about how the government might raise the funds required to manage the economic fallout from the Covid-19 pandemic. Changes to the capital gains tax (CGT) regime are seen by many commentators as one likely source of additional tax revenue.
Discussion about potential changes to the CGT rules has followed the publication of a report from the Office of Tax Simplification, at the request of Chancellor Rishi Sunak, with a second expected ahead of the Budget. If enacted, these changes could have material implications for investors.
Capital Gains Tax
The current CGT rates are 10% for basic rate taxpayers and 20% for higher and additional rate taxpayers, increasing to 18% and 28% respectively if disposing of properties that are not principal private residences.
The proposed changes include aligning the rates of CGT with income tax rates, which are currently 20% for basic rate taxpayers, 40% for higher rate taxpayers and 45% for additional rate taxpayers. Furthermore, it is suggested that the CGT allowance, within which individuals can realise tax-free capital gains, be reduced from its current level of £12,300 to between £2,000 and £4,000.
There is also the possibility of a change to the treatment of capital gains following the death of an investor, such that the book costs of their investments may not be increased to their probate values on death but, instead, any subsequent disposals of the investments made by a beneficiary would be taxed on the capital gains made from the original dates of purchase, based on their costs at that time, rather than on the capital gain accrued from the value of the investments at the date of death.
How investors may be affected
Over the years, many investors will have accumulated significant capital gains within the taxable element of their investment portfolios. Therefore, any tax changes such as those outlined above would present significant challenges.
For example, these changes might be regarded as a catalyst to crystallise at least some capital gains over and above the available CGT allowance to hedge against the risk of having to pay even higher levels of tax in the future following any change in the CGT regime.
Action to take now
Whilst wholesale changes to investments should not necessarily be made based on these proposed changes, which are not guaranteed at this stage to be put into effect, this may be a good juncture for investors to review their financial circumstances.
This is of particular importance to those who are higher rate taxpayers and/or anticipate a requirement to draw cash from their investments for whatever reason in the foreseeable future. We would of course be delighted to help with any such deliberations.
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