Chan­cel­lor’s cap­i­tal gains tax re­view her­alds start of sweep­ing re­forms

Harry Bren­nan looks at Rishi Su­nak’s op­tions on how to dig him­self out of a £322bn black hole

The Daily Telegraph - Business - - Business -

Rishi Su­nak has or­dered a re­view into cap­i­tal gains tax, as the Chan­cel­lor faces the prospect of a £322bn black hole caused by Covid-19. It has prompted spec­u­la­tion that the Chan­cel­lor is plan­ning sweep­ing re­forms to raise rev­enue.

HM Trea­sury in­sisted the sud­den an­nounce­ment was part of a stan­dard in­ter­nal au­dit of the sys­tem. CGT raises less than £9bn a year from just 300,000 peo­ple, mak­ing up less than 1pc of Trea­sury in­come. In­come tax, the Gov­ern­ment’s largest sin­gle source of rev­enue, gen­er­ates al­most £200bn.

The re­view will as­sess ex­emp­tions, rates and re­liefs, in­clud­ing the 0pc rate that ap­plies to peo­ple sell­ing their main home. Cap­i­tal gains tax is cur­rently levied for higher-rate and ad­di­tional-rate tax­pay­ers at 20pc on the sale of as­sets such as shares and at 28pc for res­i­den­tial prop­erty that is not a pri­mary home.

Ba­sic-rate tax­pay­ers are charged CGT at 10pc and 18pc re­spec­tively, but only if the tax­able pro­ceeds from the sale added to their in­come is less than £50,000, the ba­sic-rate in­come tax thresh­old. Any gain above this is paid at the higher rate. These are the five pol­icy changes ex­perts think are most likely and what the cost would be to the tax­payer:

Lift­ing rates in line with in­come tax

Pun­dits have sug­gested bring­ing the main CGT rates in line with in­come tax, payable at 20pc for ba­sic-rate pay­ers, 40pc for higher-rate earn­ers and 45pc for ad­di­tional-rate tax­pay­ers. The cur­rent dif­fer­ence be­tween the two rates gives wealth­ier tax­pay­ers an in­cen­tive to take their in­come from in­vest­ments gains.

For­mer Chan­cel­lor Ge­orge Os­borne in­creased the top rate from 18pc to 28pc in 2010 to re­duce this in­cen­tive and cal­cu­lated that the Gov­ern­ment would make roughly £60m for every one per­cent­age point re­duc­tion in the gap be­tween the two levies.

Cut­ting CGT breaks

Low­er­ing the £12,300 an­nual CGT al­lowance to bring it in line with the £2,000 div­i­dend al­lowance would again re­duce the in­cen­tive to take in­come in the form of gains. The £10,300 de­crease in the ex­empt amount would mean an in­creased tax bill of al­most £2,900, as­sum­ing the same £50,000 gain on the sale of a sec­ond prop­erty.

Scrap­ping nine-month ex­ten­sion

The Daily Tele­graph’s tax colum­nist Mike War­bur­ton said one of the most likely changes could be scrap­ping the

nine-month tax-free pe­riod be­tween buy­ing a sec­ond home and sell­ing a main home, which can be used by peo­ple with more than one home to avoid CGT when they buy and sell prop­er­ties. If this was scrapped, an in­di­vid­ual would have to sell the mo­ment they moved out.

The cap­i­tal gain would be timeap­por­tioned to re­flect the loss of main res­i­dence re­lief. Some­one with a gain of £100,000 who sold their main prop­erty nine months af­ter mov­ing out of their for­mer home would have to pay £7,500 in CGT, ac­cord­ing to Blick Rothen­berg’s fig­ures. Cur­rently, they would pay noth­ing.

Scrap­ping £40,000 let­tings re­lief

Another pos­si­bil­ity would be to scrap the £40,000 tax-free al­lowance on rental in­come where a main home, or part of it, is rented out be­fore it is sold. It would mean an ad­di­tional tax cost of £11,200, based on the main 28pc rate.

Abol­ish­ing pri­mary res­i­dence re­lief

Scrap­ping the 0pc rate of CGT for peo­ple sell­ing their main res­i­dence al­to­gether is un­likely, ex­perts have said, as it would put peo­ple off mov­ing home.

It would act against the Chan­cel­lor’s tem­po­rary stamp duty hol­i­day an­nounced in the sum­mer Bud­get last week, which is de­signed to re-en­er­gise the hous­ing mar­ket.

Abol­ish­ing this re­lief would mean a higher-rate tax­payer pay­ing 28pc on any gain in the prop­erty’s value since pur­chase, in ex­cess of the £12,300 an­nual tax free al­lowance.

Scrap­ping the re­lief would pro­vide a large boost to how much the tax gen­er­ates, adding be­tween 100,000 and 200,000 res­i­den­tial prop­erty trans­ac­tions into the tax net each year.

Ge­orge Bull of tax firm RSM UK said it was more likely the Chan­cel­lor could in­tro­duce a limit to the re­lief in the form of a new life­time al­lowance.

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