What a Change in Capital Gains Tax Could Mean for You

Year Published: 2020

Many experts expect that the government will soon introduce changes to capital gains tax.

Support measures introduced by the UK government as a result of the coronavirus crisis are anticipated to have cost around £190 billion. This eye-watering sum was needed to help steer the economy through lockdown and into the much hoped for recovery.

However, the question has now turned to how this sum will be paid for. PM Boris Johnson and other senior government figures have already said that they do not want to make significant cuts and usher in a new era of austerity, so they must find a way to raise more money.

This task falls to the Chancellor, Rishi Sunak, who has now ordered an urgent review into Capital Gains Tax, which is seen by some as the ‘low hanging fruit’ that could be easily picked.

What is Capital Gains Tax?

Capital Gains Tax (CGT) is a tax applied to profits made when you sell or dispose of an asset that has increased in value. It applies to any asset that you can invest in, in the hope that the value will increase, for example a second property or shares. If the value of the asset increases after purchase, then CGT will charged on the profit made at sale.

There are exemptions and an annual tax-free allowance, this being the limit on gains that an individual may make before they become liable for CGT, which is currently limited to £12,300 per year. Once CGT becomes payable, various rates apply depending on the individual’s annual income and the type of asset being disposed of.

Why Make Changes to Capital Gains Tax?

Put simply, many believe that CGT does not raise enough revenue. Experts believe that with changes it could be possible to raise more than five times the current annual amount of around £9 billion. Criticism is also levelled at the rates of CGT, which are seen as too low and mean that wealthy investors will see their gains taxed under CGT at 20 per cent instead of 45 per cent as would be the case if it was income.

The Chancellor has said that the review will be completed by October, in time for November’s budget and that could be the moment that changes are announced. Amongst the potential measures being speculated on is a change in the bands to bring them in line with income tax, and the scrapping of the annual personal allowance.

What Other Steps Could the Government Take?

Entrepreneurs’ relief is a tax exemption for people who sell their companies and is expected to be in the firing line. Under the scheme, individuals selling qualifying assets (such as shares in their company) will, subject to meeting the eligibility criteria, pay CGT at just 10 per cent. This is limited to a value of £1 million having already been reduced from £10 million at the last budget. However, it is now believed that the government may scrap the relief altogether.

What Can Investors Do?

It is important to point out that all of the above is speculation, but it does look likely that the government will introduce some changes to CGT.

With that in mind, investors may consider crystallising their gains now before the anticipated changes are announced in November’s budget.

For business owners considering an exit from their business, this could present the last opportunity to maximise their gains and take advantage of low rates of CGT.

If you are a business owner looking to sell your business and would like more information or guidance, please contact Matthew Canfield, Corporate Solicitor on 01244 305984 or email [email protected].

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