Capital gains tax made headlines in March when Prime Minister Rishi Sunak published his tax returns, and as the tax-free allowance halves, the spotlight narrows, says Olivia Meekin Partner in the Private Client team.
The Prime Minister’s tax return brought capital gains tax into sharp focus. On earnings of £1.9m, Rishi Sunak paid just over £432,000 in tax thanks to significant profits made on the sale of unnamed assets and the lower tax rates applied to capital gains.
There is no question that the Prime Minister has taken significant advantage of the capital tax regime, but it has led to louder calls for reform.
Capital gains tax, at its most basic, will see individuals pay tax on the profits following the sale of certain assets. This will include, for example, the sale of second homes (the main home is excluded), shares and certain investments.
A basic rate taxpayer, paying 20% tax on income, faces a capital gains tax rate of 10%. Higher and additional rate taxpayers, paying 40% and 45% tax on income respectively, are taxed at 20% on non-property capital gains. Capital gains on the sale of property, excluding the family home, are taxed at 18% and 28% depending on income tax rates paid.
Capital gains tax was first introduced in 1965 with a flat rate of 30%. In 2008, that was changed to 18%, with today’s rates set in 2016.
Whilst the headline tax rates have not changed, the tax-free allowance was halved from £12,300 to £6,000 in April, halving again in 2024 to just £3,000. It will mean anyone selling qualifying assets will pay more in capital gains tax.
It is a valuable tax for the Government, generating £14.3bn in 2020-21 tax year and expecting to increase to £18bn by 2028. And with the pressures on the public purse squeezed further reforms should not be a surprise
Just three years ago, the now-dismantled Office for Tax Simplification called for capital gains tax and income tax to be aligned. And whilst no political party has said it will increase capital gains tax rates, it would be an easy target, targeting wealthier individuals.
Capital gains tax reform, like all tax reforms, is a balancing act. High rates of capital gains tax might deter investors from making further investment or discourage those from selling assets. Any further reform of capital gains tax will need to accompany complex exemptions that can be applied to balance competing voices.
Individuals making disposals that will trigger capital gains tax should take advice.
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The above is accurate as at 04 April 2023. The information above may be subject to change during these ever-changing times. The content of this note should not be considered legal advice and each matter should be considered on a case-by-case basis.