It could be argued that a capital gains tax (CGT) liability is a nice problem to have. It means that the value of an investment has increased and a profit has been made upon it being sold. The gain needs to be at least £11,300 in the current tax year (2017/2018) before tax is payable, as an annual exemption is available to all UK resident individuals.
There are some exceptions where no CGT is chargeable, such as gains on an individual’s primary residence, holdings in ISAs or on the sale of gilts. For all other assets CGT is charged on the gain after exemptions and allowances.
Since the 6th April 2016, CGT for non-residential property has been charged at 10% for basic rate taxpayers or 20% for higher rate taxpayers; second homes and investment properties are taxed at 18% or 28% respectively (the old rates). Trustees and personal representatives always pay CGT at the higher rate.
Investment income and gains are taxed in different ways and there is a long-standing disparity between the rates of income tax and capital gains tax.
As plans were being made to start the recovery after the global financial crisis there was speculation that CGT rates might increase from a single rate of 18% in order to address this difference and also generate more tax revenue. No change materialised in the 2009 Budget or in the March Budget of 2010.
Unusually, the top rate of CGT was eventually changed mid-year in George Osborne’s first Budget, shortly after the General Election in 2010. The rate payable by higher and additional rate taxpayers was increased to 28%, effective from midnight on the day of the announcement. This created additional complexity when calculating how much tax was due that year, as the rate applicable to any taxable gain was determined by the date it was realised. The immediacy of the rate increase also left no time to plan for the change.
We live in uncertain times, both politically and fiscally, and we know that the forthcoming Autumn Budget will be when any fiscal changes will most likely be announced. We have therefore started to consider whether the rate disparity between income tax and CGT will continue and whether or not the current low rates of CGT present an opportunity.
Many of our clients, who are long-term investors, are holding assets that stand to make significant taxable gains if sold. A decision to retain the investment may be taken based upon a positive outlook for the investment or it could simply be that there is a reluctance to trigger a tax liability upon the sale, hence it is retained. If it is the latter, then disposing of those assets would potentially mean paying some tax now. But whilst rates appear to be as low as they are anticipated to go, could crystallising those gains be an appropriate course of action for some in order to free up the capital for other uses?
Funds could then be reinvested to better meet objectives that may have changed substantially over the time the investment has been held. For example, moving from a growth strategy to one that prioritises the minimisation of inheritance tax (which charges 40% to capital as opposed to CGT taking 20% on just the gain) to restructure investments to improve tax efficiency over the longer term which could also have a greater overall tax impact.
We would therefore encourage a review of your circumstances to consider whether changes could, or should, be made to portfolios to take advantage of the current, historically low rates of CGT. Whilst electing to bring forward a tax liability might feel counterintuitive at the first look, upon further consideration it might actually present a good opportunity for some to improve their longer term position.