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capital gains tax on sale of property

The last year has been extraordinary and as the Government guides us back to some normality there are questions regarding how they are going to recoup the increased expenditures accorded to countering the COVID-19 pandemic. One area the government is looking at is the Capital Gains Tax.

Back in June 2020 the Chancellor, Rishi Sunak requested a review of the current Capital Gains Tax (CGT) laws by the Office for Tax Simplification (OTS). The resultant reports were wide in scope and have illustrated for the government several ways to simplify CGT as well as increase their overall revenue through this particular tax.

In this article, we have summarised a few of the key points that may impact property investors in particular. However, it’s worth noting that these changes are not guaranteed or finalised and may not take effect. This article is not recommending any particular course of action but is for informational purposes only. In most cases even if they do enact all of the proposed changes they won’t take effect immediately and adjustments won’t necessarily be required before the next tax year.

If you think you may be in this group of affected individuals you should get in touch with your financial advisor to discuss how this might impact your situation.

Potential Changes to CGT Rates

In its first report in November 2020, the OTS recommended that CGT rates be brought in line with income tax. This could result in a significant increase in CGT rates if this recommendation is implemented.

The tax rates for long term capital gains would in this circumstance change as follows:

Proposed Changes Current Rules For Property Proposed Rules Current Rules For Assets Proposed Rules
Basic taxpayers 18% 20% 10% 20%
Higher rate taxpayers 28% 40% 20% 40%
Additional rate taxpayers 28% 45% 20% 45%

Changes to the CGT Allowance

On top of increasing the capital gains tax rate the OTS report also recognises that there are people that avoid tax liability by using up their personal allowance every year. The report suggests that in order to capture more capital gains that the personal allowance be reduced.

The personal allowance is currently (2021/22 tax year) £12,300. The OTS recommends in their report reducing this to between £2,000 and £4,000.

Despite these recommendations, the Government confirmed in the Spring 2021 Budget a series of tax freezes including that the personal allowance for CGT will be frozen until 2026.

Changes to CGT on inherited assets

Another important aspect the OTS reports scrutinise is the ‘CGT uplift’ on inherited assets. In certain circumstances assets that are passed on through inheritance benefit from a CGT uplift which increases their base rate from the previous purchase price to their current value.

For example, person A bought for £250,000 and sold the property for £350,000. In this case, they would be liable to pay capital gains tax on the £100,000 increase (minus their personal alliance of £12,300).

However, under the current rules, if the property qualifies for the ‘CGT uplift’, if they passed on the property to person B and person B then sells the property, they would not be liable for any capital gains as they sold the property at the same value as they inherited it.

Removing this uplift would make person B in this scenario liable to pay CGT on the increased value just as person A was.

This means that inherited assets over the inheritance tax allowance of £325,000 could be taxed twice. As well as paying 40% inheritance tax on anything over the allowance, CGT would have to be paid in the event of the asset’s sale.

Conclusion

At this time these are just recommendations and we do not know which if any of these recommendations will be implemented. However, the government will be looking to increase its revenue over the coming years to make up for the increased expenditure due to the pandemic. Tax increases are never popular with the public, which is one of the reasons CGT may be a prime target for increases. The burden of CGT doesn’t fall with the majority – rather a minority of less than 500,000 people pay CGT in any given year.

If you are planning within the next few years to sell a property, business, or another substantial asset on which there are significant gains it may be worth reviewing these suggested changes in greater detail to discuss them with your financial advisor or accountant to formulate a suitable plan to mitigate the potential increase in tax liability.

OTS Reports on Suggested Capital Gains Tax Changes

(1) https://www.gov.uk/government/publications/ots-capital-gains-tax-review-simplifying-by-design

(2) https://www.gov.uk/government/publications/ots-capital-gains-tax-review-simplifying-practical-technical-and-administrative-issues

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