On 13 July, Rishi Sunak, the Chancellor of the Exchequer, asked the Office of Tax Simplification (OTS) to conduct a review of capital gains tax (CGT). Despite its name, the OTS is about more than simplification, and the Chancellor is thought to be considering CGT as a means of raising money in the wake of the Covid-19 crisis, especially since it falls outside of the Conservative Party’s election promise not to raise taxes.
What is capital gains tax, and who will be affected by any changes?
If you come to sell or realise the value of an asset, you will need to pay CGT on any profit you have made. Chargeable assets include company shares, investment properties, interest you have earned on savings accounts (apart from ISAs), and personal possessions that are worth more than £6,000 (apart from cars and your main home, assuming you have not rented it out or used it for business purposes).
The amount of CGT you pay depends on your rate of income tax. If you are a higher-rate taxpayer, you will pay 28% on gains made from residential property and 20% on gains from other assets. If you are a basic-rate taxpayer, you will pay 18% and 10% respectively. Please note though that a capital gain is added to your income, so if it takes you into the higher income-tax bracket, you will be charged the higher rate for the amount over that threshold.
The good news is that everyone has an annual CGT allowance. This tax year, you can realise gains of up to £12,300 (£6,150 for trusts) without paying any CGT. If rumours are to be believed, though, that allowance may not be around forever – as we discuss below.
What is changing?
Commentators across the industry have been trying to second-guess where the Chancellor is going with this review. Many are predicting that CGT rates will rise in line with income-tax rates, which in some cases will as much as double an individual’s CGT liability. Others think he may decide to reduce, or even abolish, the CGT annual allowance whereby an individual can make gains of up to £12,300 a year before incurring a tax liability. Finally, there are rumours that he might include other assets such as private homes, which are currently exempt.
Of course, until an announcement is made, any rumours of change are just that – rumours. And with the cancelling of the Autumn Statement, we’re not expecting to hear anything from the Chancellor this side of Christmas. However, on the assumption that changes will indeed be afoot (possibly before the end of the tax year), and given that these changes are likely to be in the taxman’s favour, now is a prudent time to consider how you might mitigate any future CGT liability.
How to minimise capital gains tax
Even if you are not thinking of selling any assets this tax year, now is a good time to have a conversation with your wealth planner or portfolio manager to review your position and look for ways to reduce your liability. Here are some of the steps you can take:
1. Use your allowance
While it may not feel like the right time to sell some or all of an asset that is doing well (such as shares), it might be prudent to make the most of your annual CGT allowance before the end of the tax year since you cannot carry it forward to future tax years. For some investors, that might mean selling some or all of an investment up to the annual CGT limit and reinvesting the proceeds elsewhere. This is a technical point, and a professional adviser should advise you accordingly. In most cases, you can also transfer assets between spouses and civil partners tax-free, so it might make sense to consider transferring holdings to a spouse in a lower tax bracket or one who hasn’t used their allowance.
2. Offset losses
If your total taxable gain is above the annual allowance, you can offset some of that gain by reporting any losses you have made on a chargeable asset to HMRC. Currently, you can carry forward unused losses from previous years, although this might change as part of the review, so it’s worth ensuring you have maximised this opportunity.
3. Maximise your ISA allowance
If you invest £20,000 in a regular investment each year for the next 10 years and achieve an average return of 5%, you will make a gain of £64,136. If you then withdraw that money in one lump sum, you will have a chargeable gain of £51,836 (taking into account the annual CGT allowance), which results in a capital gains charge of £10,367 for a higher-rate tax payer and £5,183 for a lower-rate taxpayer. If, however, you invest that money in a Stocks and Shares ISA, any gains are free of CGT, and your annual CGT allowance remains intact.
4. Consider re-mortgaging rather than selling property
If you have money invested in property and you need to access some equity, consider re-mortgaging rather than selling the property as any money you withdraw through the re-mortgage is free of CGT.
How Sanlam can help
There are other ways to minimise your CGT liability and it’s always worth contacting your wealth planner or portfolio manager for an informal discussion – especially if you are not currently making the most of your annual allowance. If you are considering selling an investment property or another asset that sits outside of your Sanlam investment, we will happily discuss the implications of this with you. In the meantime, we will, of course, keep you abreast of any changes in legislation if and when they arise.