Chancellor, Rishi Sunak, has asked the Office for Tax Simplification to conduct a review of Capital Gains Tax, so what might future reforms entail?
Private Residence Relief means that nobody pays CGT if they sell their home for more than they bought it. Landlords and second home owners are still subject to CGT on the money they make selling a property, and the exemption for people’s main home is worth around £26.7bn, according to the National Audit Office.
At a time when the Treasury will surely be looking to recoup additional revenues from tax receipts, it sticks out as an obvious target. The chancellor needs to find ways to pay for the pandemic, and tens of billions saved from a single tax relief would be seriously welcome. But there are plenty of good reasons why the primary property CGT exemption exists and it is highly improbable it will be removed.
Without the relief some people would have a massive tax bill which they could only afford by taking some of the equity from a property sale transaction and using it to pay HMRC. That would subsequently impact their ability to move up the ladder so it could slow transactions and put some people off moving. The Chancellor has only just introduced temporary Stamp Duty relaxation in order to grease the wheels of the housing market, so it is hard to see him taking steps that could disturb property sales.
It could also penalise those people that have lived in their property a long time. Someone that had owned a house for several decades could face a bill worth hundreds of thousands of pounds. It means there would be a perverse incentive to move houses every few years to avoid accruing a large taxable gain over many years. So there may need to be some sort of adjustment to allow for this. Similarly, allowances would be required to enable people to deduct expenses related to the cost of extensions and improvements.
And it could also be very problematic for people that are planning to downsize to unlock some cash for retirement. The prospect of losing a significant proportion of the proceeds from downsizing could ruin some people’s plans. To avoid that, the government could allow the tax bill to be deferred until death, although it then becomes a form of stealth inheritance tax.
Alternatively, people may prefer to unlock value in their homes through equity release, although that would leave more elderly people living in large homes, locking up housing stock that could be used more efficiently by younger families.
It is much more likely that the government could pursue less radical reforms. This could include increasing CGT rates to bring them closer to income tax. In 2008 the top rate of tax was 40 per cent for CGT, so it is certainly conceivable that could rise. Although it may create a rush of people looking to realise gains on assets now to avoid a future tax rise.
Similarly, the current CGT annual allowance could be reduced. This would capture a larger number of people with relatively modest gains, increasing the footprint of CGT. Again, people second-guessing government policy might try to sidestep this by realising gains before such a change.
Another area the government may seek to review is CGT uplift on death.
In effect, CGT is overlooked when an individual dies and they hold taxable assets that have appreciated in value. This is because when the assets are transferred to someone else, normally a spouse or family member, they are re-set for CGT purposes. Instead, the assets may be subject to Inheritance Tax.
The Treasury may explore changes in this area, especially if it is coupled with reform of IHT, which the OTS has also been looking at.
The Treasury has been seen to downplay the review and while reform is certainly a possibility, it is likely to be a process of evolution rather than revolution.
CGT interacts with other elements of the tax system so reforms would need to be considered holistically for their impacts on other taxes and the consequences for people’s behaviours.
CGT is a complex area, and people that are affected by it need to consider their position in the round, including how their actions may affect their IHT position.
That means it is really important to get advice so you don’t inadvertently land yourself with an unexpected tax bill.
Rachael Griffin is a tax and financial planning expert at Quilter
