The Government’s tax gurus have drawn up a blueprint to raise a ‘substantial’ amount from the wealthiest taxpayers with a capital gains tax overhaul that would hit stock market investments, second homes and buy-to-lets.
A report into how sales are taxed floats a number of ways to rake in extra cash, including hiking capital gain tax to income tax levels, and slashing the annual tax-free amount from £12,300 to as low as £2,000.
Such measures would amount to a substantial raid on profits made from any investments held outside of an Isa or pension.
The move could see the tax rate on capital gains rocket from the current 20 per cent on investments such as shares and investment funds to 40 per cent for higher rate taxpayers.
Tax on asset sales: Officials have floated a cut in the annual exempt amount from £12,300 to £2,000
For basic rate taxpayers it would double from 10 per cent to 20 per cent, hitting those with investments held to fund retirement outside of pensions.
On second home and buy-to-let sales, the tax rate would rise from the current 28 per cent to 40 per cent for higher rate tax payers.
Basic rate taxpayers would see the rate on residential property that isn’t their manin home rise from 18 to 20 per cent.
Those paying the highest 45 per cent rate of tax would see capital gains tax climb to this level.
Officials couch many of the ideas as options for consideration by the Government, and caution that some might have unintended consequences, distort behaviour, or create extra paperwork for individuals.
But the Office of Tax Simplification, an independent arm of the Treasury, does urge the Government to tackle the ‘incoherent and distortionary’ way that CGT and inheritance tax interact, which could spell the end of the ‘death uplift’.
The ‘uplift’ means someone inheriting an asset is treated as acquiring it at its market value on the date of death, rather than the amount it was bought for.
A person’s main or only home would remain exempt, but otherwise the OTS suggests a ‘no gain no loss’ approach which would see assets valued at the ‘historic base cost’ of the person who has died.
This would mean that a widow who sold shares left to her by her late husband would pay tax based on the price paid years earlier rather than the one when the asset was transferred at death.
However, the calculation of base cost could be based on 2000 levels, rather than those in 1982 as typically used now.
Last July, Chancellor Rishi Sunak ordered the OTS to carry out a ‘review’ of capital gains tax, signalling a future raid on the wealthiest taxpayers to help pay the gigantic bill for combating Covid-19.
Tax gurus say aligning CGT and income tax would raise a substantial sum for the Treasury (Source: OTS)
How much is CGT compared with income tax?
His brief to the OTS included looking at whether the levy on asset sales is ‘fit for purpose’, ways it can ‘distort behaviour’, and the current regime of allowances, exemptions and reliefs.
Capital gains on assets ranging from shares to second homes and buy-to-lets are traditionally taxed at lower levels than income because people are taking a risk – whether an entrepreneurial one, or via their investments.
Employment income and savings interest is more guaranteed, and so is traditionally taxed differently and more heavily.
Capital gains tax rates were higher before they were reduced to a low flat rate by former Chancellor Alastair Darling, but a taper relief existed that reduced the tax for assets held for many years to reward long-term investors.
The OTS says that in 2017-18 £8.3billion of CGT was paid and £55.4billion of net gains – after deduction of losses – reported by 265,000 individual taxpayers.
By comparison, £180billion of income tax was paid in 2017-18 by 31.2million taxpayers.
The OTS’s main recommendations are as follows.
– If the Government’s ‘simplification priority’ is to reduce distortions to behaviour, it should either consider aligning CGT rates and income tax more closely, or address ‘boundary issues’ between income and gains arising from the disparity in rates.
On the latter, it suggests addressing the use of share-based remuneration, and the accumulation of retained earnings in smaller owner-managed firms.
– Should the Government want to look at closer alignment, it should also consider reintroducing a form of relief for inflationary gains, interactions with the tax position of companies, and allowing a more flexible use of capital losses.
– If the £12,300 annual exempt amount is considered an ‘administrative de minimis’ – which means a way of reducing the number of people who need to submit CGT information, the Government could look at cutting it to £2,000-£4,000.
But if so, it should introduce a broader exemption for ‘personal effects’, with only specific categories of assets being taxable, and try to cut administrative red tape, according to the OTS.
– On the overlap between CGT and inheritance tax, the Government should ‘consider removing the capital gains uplift on death’ and treat a recipient as acquiring the assets at the historic base cost of the person who has died.
It adds that if the Government removes the capital gains uplift on death more widely, it should ‘consider a rebasing of all assets, perhaps to the year 2000’ and extending gift holdover relief to a broader range of assets.
– Business asset disposal relief should be replaced with a relief more focused on retirement, and investors’ relief should be abolished
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