With Pfizer potentially weeks away from distributing a coronavirus vaccine, it seems increasingly likely that, next year the Government will shift from a pandemic emergency response mode to asking: ‘How on earth do we pay for all this?’
In this context, a recent OTS report – commissioned by Rishi Sunak - feels very much like the Chancellor rolling the pitch for a 2021 CGT raid.
It has been mooted that there could be a significant lowering of the CGT allowance (currently £12,300), aligning CGT rates with an individual’s income tax rate, or both.
If CGT and income tax rates are aligned, the impact could be widespread and significant.
Who stands to lose from a CGT raid?
Landlords would be among the biggest losers from a CGT hike, as second properties are subject to CGT when they are sold. The same would be true for anyone who wants to sell a holiday home.
Because second homes cannot be held in a pension or ISA and are difficult to sell in small chunks to take advantage of the annual exemption, a disposal is more likely to generate a significant CGT bill.
The OTS also suggests scrapping Business Asset Disposal relief, potentially hitting entrepreneurs who are currently able to pay tax at just 10% on all gains on qualifying assets.
However, it also proposes creating a new, as yet unspecified, relief more targeted at those who plan to use their business to fund their retirement, so the extent of any pain would depend on how much the two measures offset.
People who use Save As You Earn schemes – which are designed to help employees buy shares in the company they work for – could also be negatively affected, particularly if they plan to cash in large chunks of shares.
In addition, the OTS paper could pave the way for a CGT raid on those who inherit assets. At the moment, the market value at the date of death is used as the ‘base cost’ for an asset, rather than the original purchase price.
However, the OTS recommends that ‘a taxpayer should not get both an inheritance tax exemption and a capital gains tax death uplift.’ If the Chancellor were to shift the base cost to the original purchase price, this would inevitably pull more people into the CGT net.
Example – CGT impact on a £100,000 gain on second property if rates are aligned with income tax
Assumptions: based on 2020/21 tax rules, full annual exempt amount available, higher-rate taxpayer, CGT and income tax fully aligned in second example.
Current rules: if after all other costs someone realises a £100,000 gain on a second property, they would pay no CGT on the first £12,300 and £24,556 on the remaining £87,700 (£87,700 x 28%).
CGT aligned with income tax: if after all other costs someone realises a £100,000 gain on a second property, they would pay no CGT on the first £12,500 and £35,000 on the remaining £87,500 (£87,500 x 40%).
How can people minimise their CGT bill?
Saving in a pension or ISA are the most common ways to build up a pot of money while keeping it sheltered from the taxman.
Both vehicles benefit from tax-free investment growth, with pensions offering tax relief on contributions and 25% tax-free cash from age 55 (rising to 57 in 2028).
Pensions are also free from inheritance tax (IHT) and can be passed on tax-free to your nominated beneficiaries if you die before your 75th birthday. The pensions annual allowance is usually £40,000 or 100% of your UK earnings, whichever is lower, although this allowance is tapered for higher earners.
Most ISAs do not benefit from upfront tax relief but do allow tax-free withdrawals, meaning you can access the money flexibly if you need it. The annual allowance is £20,000.
Lifetime ISAs (LISAs) are similar to ordinary ISAs but with a 25% upfront bonus and tax-free withdrawals for a first home purchase (provided it is worth £450,000 or less), if you reach age 60 or if you become terminally ill. In all other circumstances the LISA comes with a 20% early withdrawal charge (due to rise to 25% from April 2021).
You must be aged 18-39 to qualify for LISA, and once opened you can benefit from the 25% bonus on contributions up until your 50th birthday. The annual allowance (inclusive of the 25% bonus) is £5,000.
Bed and ISA
If someone has investments held outside a tax wrapper, one option to reduce the potential for a CGT liability is to carry out a ‘Bed and ISA’.
This simply involves selling the investments outside an ISA up to the annual tax-free CGT exemption and buying investments up to the same value in a single transaction.
This means the investments are shifted to a CGT-free environment, although you will need to take account of costs involved in selling down your non-ISA investments, including stamp duty and dealing costs.
This article is for information purposes only and does not constitute a personal recommendation or advice. Tax treatment depends on your individual circumstances and rules may change. Pension rules apply. If you choose to save in a Lifetime ISA instead of enrolling in, or contributing to, your workplace pension scheme, you will miss out on your employer’s contributions. Your current and future entitlement to means-tested benefits may also be affected.