The Government announced yesterday a review of Capital Gain Tax which may result in CGT rates becoming aligned to income tax rates. The review is to be conducted by the Office for Tax Simplification with more detail expected in the Autumn Budget.
Aligning capital gains tax rates with those for income tax and a review of the current reliefs, allowances and exemptions could, says law firm Royds Withy King, have a major impact on buy to let portfolios, second home owners, and potentially individuals receiving an inheritance.
Rod Smith, Partner and Head of Royds Withy King’s Private Client team in London comments.
“It is easy to understand why the Government is looking to reform Capital Gains Tax. Changes may be straightforward to implement, will affect those in line to receive a significant cash gain from a sale, and future revenues can easily be forecast, but it will be a bitter pill to swallow for those affected by any changes.
“Buy to let investors have seen tax advantages which they previously enjoyed, and which were made available to encourage capital investment, slowly eroded and further changes to capital gains tax will hit them hard if property portfolios are held personally. It should also be remembered that landlords are already facing Covid related requests for rent reductions or holidays.
“Second home and holiday home owners who wish to sell potentially face a CGT rate of 45% on any gain if they are an additional rate taxpayer, and their effective marginal rate can be even higher. This may leave holiday home owners choosing to delay a sale and hold on to their asset particularly if it is generating a rental income.
“And whilst not explicitly mentioned, there is a chance the Government will choose to remove the CGT uplift currently applying on death where beneficiaries inherit assets with an uplifted date of death base cost for any subsequent gift or sale of the asset. It is a valuable relief for beneficiaries, but we would not be surprised if that is scrutinised by the Chancellor following this review.”
And the proposed changes will also impact business owners looking to exit their business, as Rod explains.
“Entrepreneurs looking to exit a business are likely to face significant tax bills on any future sale of a business, and even more so if they are a higher or additional rate taxpayers. With Brexit uncertainty also on the horizon, now might be the time to sell and take advantage of current CGT rates.
“Business owners who are currently in the sale process, or considering an offer, will need to accelerate plans to take advantage of the current CGT reliefs. With CGT rates set at the time of contract exchange rather than completion, business owners may wish to look to exchange contracts as soon as they can but delay completion dates to iron out final details. This is not without its own problems and advice should be taken.
“Of course, the changes are likely to have an impact also on gains on other assets – for instance investment portfolios, second homes, investment properties and even valuable chattels. Individuals considering transfer or sale of such assets may wish to bring their plans forward.”