Currently, for individuals, capital gains are taxed at 10% within the basic rate and 20% thereafter (or 18% and 28% for gains on residential property). Each individual has an annual exemption, £12,300 for the 2020/21 tax year, to set against gains before tax kicks in. Trustees are subject to the higher CGT rates with an annual exemption half that of the individual exemption.
Historically, capital receipts may have been considered as completely separate from income receipts, such as earnings and dividends. However, it is becoming an increasingly popular investment strategy to use capital growth to provide or supplement an income stream. The lower rates of tax applicable to capital gains makes this an attractive method of providing a personal income from accumulated wealth. With the annual exemption broadly in line with the personal allowance, those with the means to utilise both have two bites of the tax-free cherry. Using capital profits could, therefore, provide a higher net income than a salary (or other source of income) with the same gross figures. For a Chancellor who needs to balance the books while simultaneously ensuring economic recovery, CGT may seem an obvious target.
Over the past few years, there have been incremental cuts on the level of CGT reliefs. We have seen a reduction of the principal private residence “final period” exemption, the loss of let property relief and a restriction on entrepreneurs’ relief. This has occurred alongside increased rates of tax on residential property and the widening of the scope of non-resident individuals now subject to CGT on residential property.
As the Chancellor has requested a response to his letter by October, this perhaps gives us a timeline for possible change. It is usually good sense to utilise tax efficient investments, such as ISAs and personal pensions and this may be another reason to shift value into these wrappers. It may also be worth considering bringing forward any plans to make gifts of assets, while the CGT treatment is, perhaps, more favourable than the regime which might be brought in later this year.
In previous budgets, CGT changes have frequently been effective from the day of announcement, so, it is entirely feasible that we could see an increase in CGT, with no time to act. Back to that crystal ball, we do not know what the future may hold, but this may be a good time to consider your options.
If you would like to discuss this subject further or require advice, please get in touch with a member of our Tax and Trusts Team.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at July 2020.