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  • Katherine Bullock

Crystal ball gazing – what is on the cards for Capital Gains Tax?

Given Brexit and the Pandemic, it is not surprising that tax changes may be near the top of Chancellor’s priority list and whilst there is growing recognition that increases in November may not help the economy, they do seem inevitable in the near future. The question is whether there will also be a change to tax policy and there are two areas that are receiving increasing attention and speculation: the potential for changes to Capital Gains Tax, and related to that, the perennial spectre of a new Net Wealth Tax.

"Changes are already being made to accelerate the collection of tax…"

Increasing the tax take What potential changes might be in store for Capital Gains Tax, and what form might they take? If the government’s aim is to raise tax revenues to help reduce the huge costs incurred over the last few months, it has three main avenues of approach: tax the existing base more, expand the base to tax more people, and/or accelerate tax collection. Regarding the first, it seems unlikely that this will be the main thrust of a serious strategy to increase the tax take considering the meagre number of people who pay CGT in the first place, although an increase as part of a wider policy objective might be on the cards. Matching CGT rates to those of income tax would have a number of benefits in terms of simplifying the tax as a whole and smoothing out some of the wrinkles in the current system. It might achieve the objective of reducing tax avoidance and save the taxpayer a few headaches navigating the complexity of the different rates that they have to contend with at present. However, will there also be a compensating relief for the impact of inflation? And expanding the use of capital losses is contentious.

Increasing the tax base If the Chancellor is serious about increasing revenue as opposed to making a point, he will need to apply CGT to more people. But how? It does feel like a political hot potato and whilst people may recognise and support the need for more people to pay tax, they are often thinking of other people. CGT is an unpredictable tax and changes of this type have a habit of misfiring. One example was the relatively recent expansion of CGT to include non-residents who owned land in the UK, catching many by surprise. Taxpayers failed to report, interest was charged, and penalties levied with resulting appeals to the Tribunal, where ignorance of the law was found (sometimes but not always) to be no excuse.

Increasing the tax base could be accomplished in several ways, about which a great deal has been written. For example, the relief on the disposal of a person’s principal private residence could be abolished or limited. Would such a change apply only to mansions or to all properties, perhaps with rebasing or a form of rollover relief? Exceptional times call for exceptional measures. There are a wide variety of luxury assets currently not chargeable to CGT that could be brought within charge in any policy rethink – items such as vintage wine, classic cars, antique clocks and gambling winnings. Will Entrepreneurs Relief – loved and loathed – survive? Another target might be the CGT free uplift on death, although the interaction with Inheritance Tax, notoriously dysfunctional in its own right, would almost certainly need consideration at the same time.

Tax administration Changes are already being made to accelerate the collection of tax with the burden and cost of compliance being placed squarely on the taxpayer. The requirement since April for UK resident taxpayers to report and pay CGT on residential property that is subject to the tax within 30 days of completion is a dramatic and challenging change, leaving little breathing space. Short deadlines lead to mistakes which can be costly. Was this unexpected or was it accepted as a price the taxpayer should bear in pursuit of higher taxation goals? HMRC’s increasing reluctance to issue tax clearances, preferring to keep their cards close to their chest, can leave taxpayers keen to do the right thing vulnerable and uncertain. Changes to the methods by which tax is reported, such as via online forms, are not always accompanied by the necessary improvements to HMRC’s online infrastructure.

A net wealth tax? Can changes to CGT occur without looking at capital taxes as a whole? For almost half a century, governments across the political spectrum have contemplated a Net Wealth Tax. The idea of a tax targeting only those with large amounts of money may have its appeal. The problem again is that if you exclude major assets, for example the value of a home and a pension, few might end up paying, making the tax unprofitable or uncollectable. So perhaps a net wealth tax really means a reform of inheritance tax? In which case, reliefs such as business property relief and agricultural property relief may be vulnerable.

Tax design is complex and its purpose is often opaque. Whilst it would be premature to act solely on predictions of change - more akin to fortune telling than strategic decision-making, an awareness of the possibilities can be useful when formulating a plan.


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