The Government is reviewing Capital Gains Tax – just what might change?

July 30, 2020

Even in the modern age of political “opinion mining” and “soft leaking”, there has not yet been any overt steer from the Government as to what specifically it would like to do with the CGT regime (other than, presumably, for it to raise more revenue).

However, in the document setting out the situation, it has earmarked four particular “themes” for specific discussion. We use these to set out our thoughts as to where future changes could occur.

1. Allowances

Currently, each taxpayer receives an annual exemption of £12,300 against any personal gains made in a tax year. Relatively speaking, this is a modest amount per person and this is recognised by the OTS who indicate in the paper that the majority of CGT is actually paid by a “relatively small number of taxpayers”.

Based on these two inputs, we would think it very unlikely that the personal allowance would be removed or even reduced (although it may not be further increased in the short to medium term).

2. Exemptions and reliefs

This is an area that is likely to be eagerly studied by the OTS, as it may be more palatable (and logistically easier) to restrict access to certain reliefs and exemptions rather than changing the whole system. In respect of share incentives, the key consideration is whether Entrepreneurs’ Relief (now known as Business Asset Disposal Relief) will be further eroded.

Given that there has always been a relief of this type available, it is likely that it will continue – although it would not be surprising if the qualifying conditions narrowed. However, there is likely to be more debate about whether shares acquired via EMI Options will also get this relief. The decision that is made on this will be an excellent bell-weather as to whether the purpose of any CGT reforms is to encourage enterprise or to raise taxes.

3. Capital Losses

It is likely that only a very few people will have sufficient assets (and transact in them frequently enough) for capital losses to be a particular issue. Whilst changes may occur here, they may again just be a narrowing of the rules which will have no or little effect on the majority of employment based share plans.

4. Tax rates

This is the area which is most likely to receive the most scrutiny and which would be the easiest for the Government to change from a practical perspective (as comparatively little new tax legislation would likely need to be introduced).

An idea which has waxed and waned in popularity is aligning the rates of income tax and capital gains tax to the higher income tax levels. Again, whilst a seemingly simple idea, we would hope that it is one that the wider economic departments within the Government would push back against.

In our view, there is surely no coincidence between the continued lowering of the CGT rates and the increase in entrepreneurship within the UK economy. A return to what would be seen as “prohibitive” levels of taxation on assets created by individuals through their own hard work would be unhelpfully detrimental at a time when keeping the economy moving forwards is of paramount importance.

What is more interesting in this area is that the OTS have specifically flagged the potential to introduce a distinction between “Short term” and “Long term” capital gains. This is a concept which has been running in the US for over 20 years and was the basis for the seemingly popular CGT “Taper Relief” legislation at the turn of the century in the UK.

It is considered very likely that such a change could be introduced following this review and would most likely follow the simple US system (which taxes gains on any asset held for less than one year at the higher income tax rates). Whilst onerous for anyone who acquires shares in a business that is unexpectedly purchased by a third party, such a change would likely leave the majority of employee and director share plans unaffected.

We will continue to keep our clients and contacts updated on any developments. However, if you would like further information about the issues raised in this article or to discuss any questions you may have, please contact Stuart James.

Specific details regarding the Government’s process for consultation can be found here in the second part of our article on carried interest.

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