Is there a Great Tax Raid coming?

Capital gains tax is one of many tax-based challenges in life. That’s for those paying it of course. The Government loves it – and estimate it’ll bring £15.2bn in tax receipts this tax year. But the real rate has crept up, as the exemption has been lowered. Will Labour think of ways to use CGT to raise more money? We don’t know … but there is a work round if you’re married or in a civil partnership.

Complexity

We all know the UK tax system is complicated. One group of experts says, “there are over 100 taxes – and if you know the exact number we’d love to hear from you!”

Capital gains tax – or CGT as most people call it – is right up there for complexity. As you probably know, it’s the tax levied on profits made from the sale of assets. It’s not big, at 1.3% of tax receipts and 0.5% of national income.

But if you pay it, and if you don’t manage your exposure carefully, it can dent your and your family’s wealth considerably. After all, the tax tends to fall on a relatively small number of people, with analysis saying just 100,000 people pay a quarter of all CGT.

It’s also been subject to recent change. The amount of your profits which are exempt from the tax was once £12,300 a year. Now it’s a mere £3,000, bringing in an estimated extra 570,000 CGT payers.

But will it be subject to further change?

Equalisation

Apart from a change to CGT in the private equity industry, the Labour manifesto was pretty quiet on the tax.

What’s not lost on us is that CGT and income tax are paid at unequal rates. Ironically it was a labour chancellor, Alistair Darling, who reduced CGT to 18%, after a Conservative Chancellor, Nigel Lawson, had previously equalised them.

According to one think tank, someone with an income of £60,000 a year through capital gains or dividends pays less tax than an under 65 who earns £35,000 from their job.

We don’t have a crystal ball, but Treasury ministers and officials know this imbalance well and it feels like the sort of thing they might address at some stage.

Clearly it has the moral argument of fairness on its side.

But does the party that declared itself pro-business earlier this year, and which must breathe life into a comatose economy, really need to punish wealth creators? The very people on whom economic regeneration will rest?

It’s hard to be sure – but let’s not rule it out.

Homes under the hammer

One of the biggest exemptions to CGT is your home – that’s to say your primary residence. Sell a second home and you pay the tax, sell your main home and you don’t. A rare example of simplicity amidst complexity.

With such a momentous change overnight on 4-5 July, we can’t rule anything out, but this feels like it could be a step too far.

The housing crisis, and the necessity of building hundreds of thousands of new homes, requires smooth problem solving, not grit and friction. Giving people an incentive not to move home would surely slow a market down, not help it.

Acting now

Of course, if you have plans to dispose of an asset and take profits, then the time to act is certainly now.

And one way to act is to transfer assets between you and your spouse or civil partner without incurring an immediate CGT liability.

CGT is usually applicable on any profits you make on an asset sale or disposal. However, if you gift it to your spouse or civil partner on a ‘no gain, no loss’ basis your sale proceeds are counted as neither a gain, nor a loss – irrespective of the sums involved.

In essence, such a transfer is a deferral of CGT and not an avoidance. If the transferee decides to dispose of the asset they will have to pay CGT in the end. However, they may benefit from another exempt annual amount in the year of sale.

It can be a complex issue. But that’s where our expertise comes in.

If we can help with your CGT planning, please get in touch on hello@firstwealth.co.uk or call 020 7467 2700.

[1] https://obr.uk/forecasts-in-depth/tax-by-tax-spend-by-spend/capital-gains-tax/

[2] https://www.aims.co.uk/different-taxes/

[3] https://obr.uk/forecasts-in-depth/tax-by-tax-spend-by-spend/capital-gains-tax/

[4] https://www.lovewell-blake.co.uk/news/capital-gains-tax-changes-a-summary

[5] https://www.if.org.uk/research-posts/play-fair-equalising-the-taxation-of-earned-and-unearned-income/

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