“Increases in capital gains tax are inevitable now, despite doubts expressed ten years ago”, says Mark Lee, Chairman of the Tax Advice Network.
On 13 July, the Chancellor asked the independent Office of Tax Simplification (OTS) to undertake a review of Capital Gains Tax (CGT) in relation to individuals and smaller businesses. “The publication of a full scoping document on 14 July, just one day after a formal request was issued, suggests the request was no surprise.” Says Lee. “So, as the Sunday papers predict today, we are likely to see increases in the next Budget”.
The wording of the letter references capital gains as being a type of income. “This is odd language” says Lee, “as the Chancellor must know that CGT doesn’t tax income. By definition CGT taxes capital gains. That’s the increase in the value of your investments – and CGT is only charged when you realise those gains by selling your investments – things like second homes, shares, paintings and so on”.
“No one wants to say it but increasing CGT makes good political sense” says Lee, who was himself a tax adviser for 25 years. “I remember discussing this very point with Sir Edward Troup at a tax conference in 2010. Back then he doubted that aligning the rates of CGT and income tax would increase the tax take from CGT. I wonder what has changed?”
There are many exemptions and reliefs from CGT and an annual exemption. This means that the first £12,300 of capital gains anyone makes each year is tax free. This rule simplifies things for the majority who cannot make significant capital gains.
Notes for editors:
1. Mark Lee is a Fellow of the ICAEW and of the CIOT. He is a former tax partner at the accountancy firm BDO and a former Chairman of the ICAEW Tax Faculty.
2. The Tax Advice Network, launched in 2007, operates the FindATaxAdviser.online website and has members all over the UK.
3. In May 2010 George Osborne, Chancellor in the new Coalition Government, announced that he would “seek ways of taxing non-business capital gains at rates similar or close to those applied to income, with generous exemptions for entrepreneurial business activities. In his Budget on 22 June 2010 he raised the top rate of CGT to 28%.
4. Mark Lee’s subsequent conversation with Sir Edward Troup is recorded on the Tax-Buzz blog entry 5/7/2010: “CGT rules unlikely to change again in this Parliament”.
5. In 2010, Troup was Managing Director of the Budget Tax and Welfare directorate at HM Treasury. He later became Executive Chair and First Permanent Secretary of the HM Revenue and Customs (HMRC) in April 2016. He retired in December 2017, and was knighted in the 2018 New Year Honours.
6. On 13 July 2020 The Chancellor of the Exchequer, Rishi Sunak, asked the OTS to carry out a review of Capital Gains Tax to identify simplification opportunities. The scoping document for the review was published on 14 July 2020.
7. The rate of CGT has changed over time since it was first introduced in 1965. Until 1988 it was fixed at 30%. Then for 20 years CGT was payable at income tax rates, as if it was additional income (but with it’s own set of reliefs and exemptions). It was a Labour Chancellor, Alastair Darling, who reduced the top rate of CGT from 40% (when it was aligned with the then top rate of income tax) to 18% in 2008. In recent years the top rate of CGT has been 28% whereas the top rate of income tax is now 45%.
8. Lee questioned the rationale for reducing the rate of CGT in an article on his Tax Buzz blog on 5/2/2009: Why are capital gains taxed at less than half the main rate of tax?