Ola Adeosun, Partner and Wealth Planner
Chancellor Rishi Sunak commissioned the Office of Tax Simplification (OTS) to carry out a review of capital gains tax (CGT) last July. This brought to attention the trade-offs needed to plug the estimated £271 billion1 deficit caused by the COVID-19 pandemic to the treasury's coffers. For the OTS, it represented a mandate to carry out its first detailed analysis focused specifically on CGT.
CGT review – the focus
In November last year, the OTS issued the first of two planned reports, looking into the policy and design of the existing CGT regime and, outlining four specific areas for reform:
CGT review – the backdrop
The OTS proposals are far reaching and go beyond simply increasing current rates of CGT. However, this approach is necessary for CGT to have a substantial impact on Government tax revenue. Similar to IHT, CGT raises a relatively small amount of tax with only 265,000 individuals a year contributing, and over 70% of those not having incurred a CGT liability in the previous 10 years4. It represents 1% of the UK Government's tax revenue of £800 billion. In comparison, income tax, national insurance contributions (NIC) and value added tax make up three quarters of the tax intake every year. Any increase in the rates of these three taxes however, would necessitate breaking an election manifesto promise.
Another interesting development was the wealth commission report issued in December 2020; assessing the merits of introducing a wealth tax whilst stopping short of making any recommendations. The commission's modelling indicated that a 1% rate per year for a period of five years for those with a net wealth in excess of £500,000 would raise a whopping £260 billion. An astonishing sum that would go a long way to addressing the fiscal deficit. Whilst such a 'solidarity tax' in the wake of the pandemic cannot be entirely ruled out, its introduction may prove unpopular and, it could potentially be too complex to implement. The OTS recommendations to reform CGT and IHT are the more likely strategies the Government would implement to increase revenue from capital taxes.
An increase to the corporation tax rate of 19% has also been mooted. However, this would present another challenge to small businesses battered by the pandemic, whilst also sending out the wrong message that post-Brexit Britain is open for business.
Predicted budget changes
Overall, a good outcome from the upcoming budget would be the Government providing greater clarity on the future trade-offs needed to repair the nation's finances, hereby allowing individuals and businesses alike to plan for the changes ahead.
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