Official report recommends significant increases in Capital Gains Tax

The Office for Tax Simplification (OTS) has released a new report that recommends ministers consider bringing rates of Capital Gains Tax (CGT) in line with Income Tax or consider addressing ‘boundary issues’ between CGT and Income Tax.

The extensive report, intended to simplify and improve the CGT system, also recommends:

  • Wide-ranging reductions in reliefs and allowances;
  • Less generous treatment of gains resulting from inherited assets; and
  • Reducing the CGT threshold to just £5,000.

Currently, CGT is levied at 10 per cent for basic rate taxpayers and 20 per cent for higher or additional rate taxpayers on gains from the disposal of assets worth £12,300 (£6,150 for trusts) or more at market value, including most personal possessions worth £6,000 or more, shares and business assets.

There is also a separate rate for property that is not a person’s main home, where a property is large or has significant grounds or where a person’s main home has been let out.

Any gains from the disposal of these properties are subject to CGT at 18 per cent for basic rate taxpayers and 28 per cent for higher or additional rate taxpayers.

Basic rate taxpayers must also pay CGT at the higher rates on the value of any gains above the higher rate threshold of £50,000 a year.

Under the OTS recommendations, CGT would be levied at similar rates to income tax. This would mean that basic rate taxpayers would pay 20 per cent on gains, rather than 10 or 18 per cent.

Meanwhile, higher rate taxpayers would pay 40 per cent on gains, rather than 20 per cent or 28 per cent abs additional rate taxpayers would pay 45 per cent on gains, rather than 20 or 28 per cent.

The recommendation to reduce the CGT threshold from £12,300 to £5,000 would mean many more taxpayers would be subject to CGT and those who would already have to pay CGT would have to do so on a greater proportion of their gains from disposals.

If the Government were to implement the changes outlined in the report, it is likely to particularly affect landlords, small business owners, investors and second home owners.

The latest CGT proposals from the OTS have added further conjecture on what the Chancellor may include in his next Budget, as the Government looks to recover the costs incurred as a result of the Coronavirus crisis.

It also comes after a recent report from the Institute for Fiscal Studies (IFS), which has said that it is “all but inevitable” that there will be tax rises of more than £40 billion a year by the middle of the decade.

With growing speculation of substantial tax rises in the years ahead, taxpayers should consider undertaking careful tax planning now that takes into account their entire financial position.

If you require tax advice or have concerns about future changes to taxation, please contact Richard Grayson.

Important message for those selling or gifting UK residential properties

An important change came into effect on 6th April 2020 which will affect everyone who makes a sale or gift of UK residential property, other than their own main residence, on or after that date. This change may have got lost in the fog surrounding the impact of the coronavirus, and the fact that there are fewer property sales progressing to completion at this time..

If you sell or gift UK residential property on which main residence relief is not available, a return will need to be submitted to HMRC, and the CGT paid, within 30 days of the completion date for the sale. Penalties for late submission will be applied if the deadline is missed, and interest will be charged on late payment. This change affects both UK landlords and non-resident landlords, although non-resident landlords have been have been subject to the 30 day reporting rule since 2015.

If there is a loss, or a no gain/no loss situation, a return will not need to be made.

It remains to be seen whether solicitors will make the return, and retain the money to pay the CGT, but it is likely that they will need to liaise with accountants/tax advisers over the calculation over the gain, so that any available reliefs can be considered. We are not only keen to help all our clients make the reports on time, but would encourage potential sellers to contact us before a sale takes place to make sure that the sale is being organised in the most tax-efficient way.

In addition to the report mentioned above, the gain will still need to be reported on the taxpayers Self Assessment Tax Return as well.

STOP PRESS – we have just heard that HMRC have extended an important deadline of this scheme, due to the impact of the coronavirus. There will now be no penalties for late submission of reports of properties sold in the period from 6th April 2020 to 30th June 2020 provided the reports are submitted by 31st July 2020. Interest will still be charged on the late payment of CGT if it is not paid within the 30 day deadline though!

Charges to paying CGT on residential property from 6 April

From 6 April 2020 there is a major change in the reporting and payment of CGT on residential property disposals. From that date, it will be necessary to report the disposal of the property within 30 days of completion of the disposal and pay CGT on account to HMRC.

This will be a significant acceleration of the payment date as CGT is currently payable with income tax on 31 January following the end of the tax year. Hence, where completion of a property disposal takes place on 1 April 2020 CGT will be due 31 January 2021. If however completion were delayed to 1 May 2020, CGT would need to be paid on 31 May 2020.

Note that the new 30-day reporting and payment obligation will not apply where no tax is payable such as the disposal of the taxpayers private residence.

If you would like any further information or would like to discuss the above changes please call Richard Grayson on 01522 815100.

Tax update – Finance Bill should now proceed

Now that the General Election is out of the way, the tax changes in the draft Finance Bill scheduled to take effect from April 2020 are now more likely to go ahead.

The key tax measures “in limbo” until legislated in Finance Act 2020 are:

– Extending the “off-payroll” working rules to the private sector

– Restricting R&D repayable credit for SMEs

– The proposed 2% reduction in P11d car benefits

– Limiting CGT private residence letting relief

If the changes to CGT private residence letting relief go ahead from 6 April 2020, it may be worth considering the disposal of a property that currently qualifies for this relief before 6 April 2020.  The “off-payroll” working rules will almost certainly proceed, even if not from 6 April 2020, and thus businesses and workers affected should prepare for the planned changes.

Contact us if you want to know how likely this is to impact on your business by calling 01522 815100

CGT Private Residence Relief Changes

Draft legislation to be included in the next Finance Bill will make important changes to the calculation of CGT private residence relief. As announced in the Autumn 2018 Budget, there will be a reduction in the final period exemption to just 9 months and stricter conditions for letting relief to apply.

Currently where a property has been the taxpayer’s main residence, the last 18 months of ownership counts as a period of deemed occupation. This will be reduced to just 9 months for disposals on or after 6 April 2020. It is understood that this is being introduced to counteract “second home flipping” allegedly used by MPs when they sell their London residences.

No Tax Free Capital Gains Tax Uplift on Death

Although the OTS were tasked with simplifying inheritance tax, they also considered the interaction with CGT as many asset transfers potentially have both CGT and IHT implications. Currently there is no CGT on assets transferred on death and the recipient inherits the asset at its market value at the date of death.

It has been suggested that the CGT uplift on death distorts decision making relating to assets that benefit from an exemption from Inheritance Tax. Where an individual holds such an asset that has risen in value, and is considering transferring it during their life, they are often advised to retain it until death rather than giving it away during lifetime, because of the tax benefits.

Where a business is retained until death, any potential capital gains are wiped out and there is no Inheritance Tax to pay. This could lead to an asset being retained rather than being transferred to the next generation at the time that is right for the business.

We will again monitor the progress of this proposed change as it is likely to have significant implications on family business succession planning.

If you would like any further help or advice on the above please call Richard Grayson on 01522 815100.

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Capital Gains Tax Letting Relief Restriction

Currently letting relief provides up to a £40,000 deduction in computing the capital gain on the disposal of a property that was at some time the taxpayer’s main residence. The relief is the lesser of £40,000, the gain attributable to the let period, and the amount of private residence relief. For a couple this could potentially exempt up to £80,000 of the gain from CGT.

The draft legislation will limit letting relief to those situations where the owner remains in shared occupancy with the tenant, i.e. has lodgers living in the house.

If you were hoping to take advantage of letting relief on the sale of a property, you might want to consider disposing of the property before 6 April 2020 to take advantage of the current rules. Contact us for advice in this area as we can estimate the additional tax that might be due following the withdrawal of this generous relief.