Interactive Investor

Investors could pay double capital gains tax under new plans

12th November 2020 13:04

Sam Barker from interactive investor

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Proposals from the government’s tax advice unit would overhaul the amount paid when assets increase in value.

Second homeowners and investors could pay twice as much capital gains tax (CGT) under plans from the government’s tax advice unit.

The Office of Tax Simplification (OTS) today released a report suggesting this, plus watering down current exemptions, could raise £14 billion.

Earlier this year the chancellor, Rishi Sunak, asked the OTS to review the tax to raise funds to pay the country’s bill for Covid-19 economic help, such as the furlough scheme.

Currently, basic-rate taxpayers pay 10% tax on capital gains, above a £12,300 a year threshold. Higher-rate taxpayers pay 20%.

CGT is paid on the gain made when individuals sell assets that have increased in value.

The OTS suggested doubling this to bring CGT more in line with income tax. 

The tax advice unit also suggested lowering the CGT threshold to as little as £1,000 to increase the number of people paying it.

At the moment the high level of the CGT threshold means taxpayers have an incentive to play the system to declare capital gains just below £12,300 a year. Around 50,000 people did this in the 2017-18 tax year.

An OTS statement said: “The disparity in rates between capital gains tax and income tax can distort business and family decision-making and creates an incentive for taxpayers to arrange their affairs in ways that effectively re-characterise income as capital gains.”

The OTS’s other ideas include scrapping the current CGT exemption on employee shares granted through share schemes and making entrepreneurs pay CGT on capital saved in their business for retirement.

But its suggestions came under fire from accountants UHY Hacker Young, who said these would “create huge disruption in the tax system”.

Graham Boar, partner at UHY, said: “Considering the amount of disruption, it’s hard to see how this would create a more user-friendly CGT system.

“The proposals seem designed to increase tax revenue and add complexity rather than simplify CGT. Making CGT much more punitive, on top of the already-unpopular IHT system, would be a very risky move for the Chancellor to make.”

But the news could be good for pensioners.

Rebecca O’Connor, head of pensions and savings at interactive investor, said: “If CGT is the current target it does suggest that pensions tax relief might now escape the Chancellor’s attention, however nothing is likely to be off the table yet – the Treasury has a lot of money to raise from taxes to pay for this pandemic.”

Around 265,000 taxpayers paid £8.3 billion of CGT in the 2017-18 year. For income tax, 31.2 million Britons paid £180 billion in the same period.

The next steps are for the OTS to publish a second report next year on how its suggestions could be rolled out, and for the chancellor to decide which measures to take up.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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