What does CGT magazine mean for investors?

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A capital gains tax review commissioned by Chancellor Rishi Sunak this week proposed sweeping tax reforms, including raising CGT rates to levels similar to those of the corporate tax. income and reduction of the annual allowance.

If adopted, the recommendations of the Office of Tax Simplification (OTS), a statutory body, would have a significant impact on some investors, business managers and rental property owners when they make gains. It comes as the government faces a daunting task of restoring public finances after the pandemic.

Beyond an annual exemption of £ 12,300, CGT is charged on earnings at 10 percent for base rate taxpayers and 20 percent for higher and additional rate taxpayers. This percentage increases to 18% and 28% respectively when the gains relate to residential property. Income tax is charged at the base rate of 20 percent, rising to 40 percent and 45 percent for top and additional taxpayers.

What does the report say?
The OTS discovered several areas where the CGT was “counterintuitive, creates strange incentives or creates opportunities for tax evasion.” He highlighted employee share ownership schemes and business leaders, who are able to recategorize their labor income into capital gains and pay taxes at lower rates.

Aligning income tax and CGT rates would reduce such distortions, the OTS said, as would imposing income tax rates on entrepreneurs and stock compensation. The government should also consider providing inflationary relief on earnings, he said.

Describing the current CGT allowance as “relatively high”, the OTS has proposed a reduction between £ 2,000 and £ 4,000. He also called for a reduction in the number of different rates charged to CGT from four to two, in order to make the system simpler and more predictable.

Regarding the transfer of wealth, he recommended removing the “capital gains gross-up” rule, which allows beneficiaries to inherit property at its value at the date of death rather than at the time. of the purchase. This encourages people to transfer their belongings and personal possessions when they die, rather than while they are alive, the OTS said. “It may not be the best for the business, the individuals or families involved or the economy in general.”

If the mark-up were abolished, the date automatically used to value assets held for a long period – such as family farms or property – would have to be pushed back from March 31, 1982 to the end of the 1990s or the year 2000, a- he added.

What do the experts think?
Several tax experts have attacked the potentially negative impact of the review for business owners, investors and owners. Nimesh Shah, managing director of the accounting firm Blick Rothenberg, called the proposals “dangerous” and “far from simplification”.

Graham Boar, partner at accounting firm UHY Hacker Young, said the recommendations would shake up the tax system and be seen as “an attack on business.”

The proposed alignment of CGT and income tax rates, with inflationary relief, would put business owners at a disadvantage over real estate investors, as inflation is likely to be a larger part of the increase in a property’s value over time, said Tim Stovold, tax manager at the accounting firm Moore Kingston Smith. ” [It’s a] nightmarish read for business owners. ”

The OTS estimated that reducing the annual exemption to £ 5,000, for example, would double the number of people paying CGT. It was a concern for the Association of Tax Technicians, a professional body, which said the allowance should not be reduced without further mitigating measures.

Meanwhile, the ripple effects that the changes could have on the housing market were dismayed. David Alexander, co-managing director of Propos, a real estate platform, said the increase in CGT “would stifle growth, discourage investment and depress the housing market” as owners rush to sell first. expected change.

The amounts that owners and owners of second homes would pay would also increase relative to a lower exemption threshold. Aneisha Beveridge, research director at estate agent Hamptons International, calculated that if the annual exemption was reduced from £ 12,300 to £ 5,000, the tax bill for a higher paying owner selling for the average gross gain of £ 69,000 this year would increase from £ 15,880 to £ 25,600, an increase of 61%.

Those assets would also inherit the scrapping of the CGT hike, Stovold added. “If this change were to become law, capital gains could accumulate over generations, making assets unsaleable due to the astronomical tax liability – a liability that could come home if sold,” a- he declared.

However, others welcomed the report’s suggestions, with some saying it offered effective solutions to improve the current rules.

Robert Palmer, executive director of the Tax Justice UK campaign group, said: “A hedge fund manager who makes millions of dollars out of his fortune should pay higher tax rates than a nurse. But the current rules mean that some people who earn millions can get away with rates as low as 10%. ”

Carys Roberts, executive director of IPPR, a think tank, said: “The proposal to align tax rates more closely with earned income and capital gains would be fairer, simpler and increase the revenues of the Public Treasury. ”

How likely is the change to take effect?
The Treasury said it would review the report “in due course”. Some people close to Mr. Sunak have indicated that the government is unlikely to pass the reforms, pointing to the lack of support for previous OTS recommendations on inheritance tax. However, tax experts said the scale of public spending in the pandemic suggested a change was on the horizon.

Rebecca Fisher, a partner at the Russell-Cooke law firm, said the Treasury was likely to take the recommendations as “obvious.”

But Laith Khalaf, financial analyst at the AJ Bell investment platform, said it would still be a big start for a conservative government. In these extraordinary times, however, the government had been prepared to do “all kinds of things” that were inconsistent with the Conservatives’ traditional values ​​of fiscal prudence and light government, he added.

What should people do?
Tax-wrapped pensions and Individual Savings Accounts (Isas) are CGT-safe, so advisers urge savers to exhaust available unused allowances.

Myron Jobson, personal finance activist at Interactive Investor, said some people could benefit from a “bed and Isa” transfer on all shares held outside of a package. This involves selling the investments up to the annual CGT exemption and buying them back up to the same value in a single transaction. However, investors doing this would incur a transaction fee.

Financial experts said entrepreneurs and homeowners, whose earnings from the sale of a business or property may be subject to CGT, will increasingly divest in the near future to avoid potentially higher taxes.

Mark Heppell, business partner of JMW Solicitors, said he also expects an increase in companies becoming employee-owned. “This is a fiscally efficient exit strategy and the swift process will continue to be very attractive given the impending changes,” he added.

But in general, planners suggest that people think carefully and take financial advice before making big decisions – especially since the government hasn’t announced any changes.

Rachael Griffin, Tax and Financial Planning Expert at Quilter, said: “[While] It is not for everyone to change their financial plans due to mere political speculation, it is worth considering in light of what will inevitably be a tougher tax environment. “

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