"After all the good news at last week’s Summer Statement, this is probably an early indication from the Chancellor that CGT is the first tax set to rise."
In the 2016 Budget there was a drop in CGT, apart from on property, where the 18% rate dropped to 10% and the 28% rate dropped to 20%.
Blick Rothenberg described the review as an "inevitable tax raid" to recoup some of the money spent during the Covid-19 lockdown period, describing the potential changes as "bad news for investors".
Private residence relief means that nobody pays CGT if they sell their home for more than they bought it. Landlords and second home owners are still subject to CGT on the money they make selling a property, and the exemption for people’s main home is worth around £26.7bn, according to the National Audit Office.
In terms of what assets would be affected, the Government has specifically asked to look at principal private residence relief. However, Killik & Co says CGT on homes seems "more difficult to implement and ultimately counterproductive to the stamp duty holiday announced on 8th July".
Svenja Keller, head of wealth planning at Killik & Co, commented: "The stamp duty holiday is to encourage a kick-start in the housing market, whereas CGT on first homes could counter that, particularly as some are sitting on very large gains in their main homes. Given previous moves on second homes and buy-to-lets, where it is already required to pay CGT, it is possible that these types of properties will remain a focal point for Sunak.
"Tax rates have been low for many years, and therefore it seems to be an obvious source of income for the Government to consider when looking at how to recuperate the cost of Covid-19. Capital gains tax rates have lately been much lower than income tax, whereas there has been a time in the past when the tax rates were more aligned.
"Although the overall take from CGT is small, the Government must start somewhere, and wealthy individuals would have benefited even in these difficult times from good market performance. It seems like an easy solution for now, however this is likely to be just the start of measures introduced in the future to start to repay the Coronavirus debt.”
Nimesh Shah, a partner at Blick Rothenberg, said: “After all the good news at last week’s Summer Statement, this is probably an early indication from the Chancellor that CGT is the first tax set to rise. There has been significant recent speculation that the main rate of CGT of 20% is set too low, and some have suggested that it should be aligned to the income tax rates, up to 45%.”
“There is a very compelling case for tax reform and simplification generally. There are five different CGT rates which could apply for an individual realising a capital gain – 0%/10%/18%/20%/28%. There is a good argument to say that there should be a single flat rate of CGT.
“After the good news for homebuyers and property investors that SDLT would be cut for transactions below £500,000, the biggest axe could fall on main residence relief – this is a very generous CGT relief which can effectively provide tax exemption for when someone sells their main residence. There has been previous speculation that the relief could become subject to a per transaction or lifetime cap or abolished completely. Property, and residential property, has become one of the most heavily taxed asset classes in the UK – the main residence is one of the few remaining tax reliefs associated with property, and so it’s logical to suggest that the Government may be looking at how additional tax revenue could be generated from this area.”
Rachel Griffin, tax and financial planning expert at Quilter, said that while the Chancellor needs to find a way to pay for the pandemic, "there are plenty of good reasons why the primary property CGT exemption exists and it is highly improbable it will be removed".
Rachel commented: “Without the relief some people would have a massive tax bill which they could only afford by taking some of the equity from a property sale transaction and using it to pay HMRC. That would subsequently impact their ability to move up the ladder so it could slow transactions and put some people off moving. The Chancellor has only just introduced temporary stamp duty relaxation in order to grease the wheels of the housing market, so it is hard to see him taking steps that could disturb property sales.
“It could also penalise those people that have lived in their property a long time. Someone that had owned a house for several decades could face a bill worth hundreds of thousands of pounds. It means there would be a perverse incentive to move houses every few years to avoid accruing a large taxable gain over many years. So there may need to be some sort of adjustment to allow for this. Similarly, allowances would be required to enable people to deduct expenses related to the cost of extensions and improvements.
“And it could also be very problematic for people that are planning to downsize to unlock some cash for retirement. The prospect of losing a significant proportion of the proceeds from downsizing could ruin some people’s plans. To avoid that, the government could allow the tax bill to be deferred until death, although it then becomes a form of stealth inheritance tax. Alternatively, people may prefer to unlock value in their homes through equity release, although that would leave more elderly people living in large homes, locking up housing stock that could be used more efficiently by younger families.
“It is much more likely that the government could pursue less radical reforms. This could include increasing CGT rates to bring them closer to income tax. In 2008 the top rate of tax was 40% for CGT, so it is certainly conceivable that could rise. Although it may create a rush of people looking to realise gains on assets now to avoid a future tax rise.
“Similarly, the current CGT annual allowance could be reduced. This would capture a larger number of people with relatively modest gains, increasing the footprint of CGT. Again, people second-guessing government policy might try to sidestep this by realising gains before such a change.
“Another area the government may seek to review is CGT uplift on death. In effect, CGT is overlooked when an individual dies and they hold taxable assets that have appreciated in value. This is because when the assets are transferred to someone else, normally a spouse or family member, they are ‘re-set’ for CGT purposes. Instead, the assets may be subject to Inheritance Tax (IHT). The Treasury may explore changes in this area, especially if it is coupled with reform of IHT, which the OTS has also been looking at.
“The Treasury has been seen to downplay the review and while reform is certainly a possibility, it is likely to be a process of evolution rather than revolution."
