Changes to Captial Gains Tax predicted

Changes to Capital Gains Tax (CGT) may be fast approaching as Chancellor Rishi Sunak looks to offset government spending and borrowing during the coronavirus pandemic. Will he answer the question everyone need answering - where will the funds to repay Covid debt come from?;
Capital gains

Increases in the Capital Gains Tax (CGT) may be fast approaching as Chancellor Rishi Sunak looks to offset government spending and borrowing during the coronavirus pandemic.

The big question on everyone’s lips is where the funds to repay the Covid debt will come from.

The Prime Minister has already said public spending will not be slashed, so of the two routes to austerity left, taxation is cited as a probable solution.

As result, speculation is rife that CGT will be brought in line with income tax rates.

Why CGT, and how might it be changed?

In July 2020, the government asked the Office of Tax Simplification (OTS) to review Capital Gains Tax. This is a fairly common action and part of the function of the organisation.

However, the timing of this particular request raised suspicion that CGT may be Sunak’s chosen route to clawback at least some of the Covid-19 losses.

CGT is currently charged at 20%. A change to the tax might see it replaced with a flat 28% rate, or at a greater extreme, an alignment with income tax, at up to 45%.

A flat rate disadvantages those with less wealth, so would be a contentious move.

The OTS favours neutral taxes that minimize changes in behaviour. So, as CGT is lower than income tax, a move to align them may be the desirable outcome.

But, driving taxpayers to avoid selling at all costs could be an even worse outcome.

In response to the speculation, Anthony Codling, CEO at property platform, Twindig, commented:

“UK government debt is at an all-time high and eventually, these debts will need to be repaid. Taxes are therefore likely to rise.”

The sector is now waiting to see how Rishi Sunak will respond to the proposals soon to be announced by the OTS, which will likely contribute to the Chancellors decisions on whether to reform the CGT tax.

Codling continued:

“Our working assumption is that capital gains tax rates will be brought into line with income tax rates, higher rate taxpayers will therefore pay higher rates of capital gains tax.”

At present taxpayer’s primary residence is exempt from CGT, but this could soon be changing for some homeowners.

“We do not expect this exemption to be taken away completely, but we would not be surprised if the amount of exempt gain was subject to either an annual cap, a lifetime cap or a combination of both. This would be similar to pension relief where the amount of tax benefit in any one year is capped as well as the taxpayers lifetime tax benefit.

“Second-home and buy-to-let property gains are already subject to capital gains tax at a higher rate (28%) than the capital gains on other assets (20%). We forecast that these rates will be equalised and reflect the taxpayer’s income tax rates.

“This will mean a tax rate increase for higher rate taxpayers and a lower tax rate for those with earnings below the higher rate tax threshold. However, it is likely that a capital gain on a property will move a lower rate income taxpayer into the higher rate tax bands.”

What does this mean for landlords?

Undeniably, the speculated proposals could have a big impact on landlords, as buy to let properties are subject to the tax when they are sold.

This could result in some landlords leaving the sector – something that would likely push up rental costs amid a reduction in supply.

With the supply and demand of rental properties already becoming an issue within England, this would have a massive impact on prospective tenants.

In light of these concerns, Timothy Douglas, Policy and Campaigns Manager at ARLA Propertymark said:

“Letting agents and their landlords play a key role in maintaining a strong and thriving private rented sector.”

“Given recent changes to mortgage interest relief, the wear and tear allowance, and the ongoing impact of Covid-19, the government must tread carefully with any plans to change capital gains tax as this could dramatically reduce the supply of rental properties.”

Recognising that significant reforms of CGT would be a difficult ticket to sell to a Conservative government, Helen Jones, tax partner at BDO feels a more measured change is likely:

“given CGT only raises a very small proportion of UK taxes and is quite an emotive issue for his own party, making widespread reforms to CGT looks like a difficult approach to sell for a Conservative chancellor.

“Therefore, I suspect that proper reform of CGT may be some way off yet, but some simplification of CGT rates and a lower annual exemption might just feature in the next Budget.”

Whatever happens, it seems that robust tax advice from a qualified professional may become a growing need for UK landlords.

This information should not be interpreted as financial advice. Mortgage and loan rates are subject to change.