In the middle of last year, the Chancellor of the Exchequer asked the Office of Tax Simplification to conduct a review of capital gains tax.

The first of two reports was published at the end of 2020 with suggested recommendations, and it is widely expected it will lead to changes in capital gains tax legislation, which may be announced in the Budget in March.

Preparing clients for possible changes

Capital gains tax falls outside of the Conservative Party’s election promise not to raise taxes and is one way of starting to replenish the public purse after the ravaging effects of covid-19. While we don’t know if or what changes will be made, we think it’s worth ensuring your clients are, at the very least, maximising all current allowances and exemptions.

The capital gains tax exemption can’t be carried forward to the new tax year, and it is also important that clients maximise their pension contributions plus any carry forward and ISA allowances, since returns and withdrawals are free of capital gains tax and income tax.

Current rules at a glance

Currently, everyone has a capital gains tax annual exemption of up to £12,300 (£6,150 for trusts subject to the number of trusts the settlor has set up). Higher-rate taxpayers will then pay 28% on gains made from buy-to-let property and 20% on gains from other assets, while basic-rate taxpayers will pay 18% and 10%, respectively. Capital gains tax is added to income, so be careful if your client is on the threshold of the next income tax bracket.

What are the suggested changes?

There are several rumoured changes to the capital gains tax rules. Here we look at some of the more likely changes and their potential impact on your clients:

Who will be affected by these changes?

If your clients fall into any one of these categories, we recommend you review their financial plan as soon as possible:

  • They have embedded capital gains within their investment portfolio.

  • They are a higher-rate or additional-rate taxpayer, or they are on the threshold of moving up a tax bracket.

  • They have a taxable portfolio that undertakes automated rebalancing without investigating ways to mitigate potential gains.

  • They take income and/or withdrawals from a taxable portfolio.

  • They are planning to leave capital gains in their estate for future generations to enjoy.

  • They are a business owner who is planning to sell their business in the future.

  • Trustees with unwrapped portfolios within their trusts.

  • They are a buy-to-let investor.

How can you help them prepare for any changes?

  • Ensure your clients are taking advantage of all the tax allowances and exemptions they have relating to income, capital gains and inheritance tax as well as maximising contributions to tax efficient savings vehicles such as ISAs, pensions and investment bonds.

  • Consider reinvesting some of their funds, thus crystallising the gain and effectively starting from zero again.

  • Discuss transferring assets to a spouse or civil partner in a lower tax bracket or one who hasn’t used their allowances.

  • Offset some capital gains by reporting any losses they have made on a chargeable asset to HMRC. Currently, they can carry forward unused losses from previous years indefinitely, as long as this is registered with HMRC within four years of when the loss occurred. This might change as part of the review, so it’s worth ensuring they have maximised this opportunity.

  • If they own a buy-to-let property, they may want to consider selling now. Alternatively, you can discuss releasing equity through a re-mortgage since that is currently out of scope for capital gains tax (although that may also change).

  • Consider moving some assets into an onshore bond since they are not subject to CGT while invested or on encashment.

Any change in tax legislation can be onerous on advisers. Should the Chancellor announce significant changes to capital gains tax allowances, our Technical team is on hand to support you with complex or trust related questions as required. 

For Financial Advisers only. Not intended for onward transmission to a private customer and should not be relied upon by any other person. Sanlam accepts no liability for any action taken or not taken by an individual or firm as a result of the contents of this material. The tax treatments and information contained in this document is based on current tax law and HMRC practice as at January 2021 and may be subject to change in the future. Whilst we have made every effort to ensure the accuracy of this material, we cannot accept responsibility for any consequence (financial or otherwise) arising from relying on it. This document is for information purposes only and should not be treated as advice and independent taxation advice should be always sought.

How Sanlam can help

We offer several products that can help with capital gains tax, and other tax mitigation. For example, we recommend you consider onshore bonds as part of your holistic financial planning offering, which your Account Director will be happy to discuss with you in more detail.
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The value of investments and any income from them can fall and you may get back less than you invested.