Perspective

Planning for a higher rate of capital gains tax


A review into UK capital gains tax commissioned by Chancellor Rishi Sunak, published in November, recommended reforms which would significantly increase tax payable on gains made when assets – such as shares and property – are sold at a profit.

It also looked closely at the use of corporates as long-term investment vehicles and the tax distortions that arise as a result. The recommendations of the review, undertaken by the Office of Tax Simplification, were broad. The main conclusions were as follows:

  • The annual capital gains tax allowance should be cut, bringing more into scope for the tax, but introducing broader allowances for personal chattels
  • Capital gains should be taxed at a higher rate, more closely aligned with income tax rates, but some allowances made for inflationary growth
  • CGT treatment for disposal of smaller companies’ shares should be reviewed, potentially taxing all or part of any gain as income
  • Tightening up or removal of Business Asset Disposal Relief, more commonly known as “Entrepreneurs Relief”
  • There should be no automatic uplift of base costs upon death, potentially introducing the “no gain, no loss” principle on transfers of inherited assets

The above could mean the tax payable in some circumstances could more than double.

Our view – January 2021

A second report, due shortly and commenting on the technical and practical issues of any proposed changes, may shed some light on the likelihood of any changes appearing in the Budget of 3 March 2021.

The Chancellor, driven primarily by a need to stimulate the economy in the wake of Covid-19, may delay. Many in his party and in the Conservative electorate will not support some of these proposed measures. However the need for increased tax revenue is undeniable and it is difficult to foresee a scenario where some, if not all, of these proposals are not implemented in some form.

Planning implications

In light of the current political shift, we think it is worthwhile reassessing existing planning arrangements. In some cases it may be worth bringing forward disposals in order to benefit from the current, relatively favourable, tax rates.

Making disposals of shares or funds for planning purposes does not need to involve any change to your long-term investment strategy.

Proceeds of any disposal can also be reinvested in a way that will make CGT less of a burden in future. For example, using a single “portfolio fund” to reflect your desired investment strategy - such as Cazenove Capital’s Balanced or Growth Fund - is a simple way of achieving this and is likely to become more popular if these changes come to fruition. Underlying holdings within a fund structure are not liable to CGT when traded; gains are only taxable on the eventual sale of units in the fund by the investor. This makes it easier to manage your CGT position, without altering the underlying mix of investments or limiting investment flexibility.

Please contact your wealth planner or portfolio manager if you would like to discuss your situation in more detail.

Today’s capital gains regime is attractive by historic standards

Capital gains tax rate payable on… Higher rate taxpayer Basic rate
Residential property 28% 18%
Other chargeable assets 20% 10%

Gains on sale of shares, in excess of the CGT allowance of £12,300 (2020-21), are currently charged at just 20% for higher and additional rate taxpayers.

This is a very favourable rate compared to the current higher or additional income tax rates of 40% and 45% respectively.  

It also looks favourable compared to the history of the tax. Capital gains were taxed at the same rate as income from the 1980s until 2008 – even if an increasingly generous system of reliefs meant that in practice many people paid much less. On this point, the recent report did recognise the need for some uplift for inflationary purposes, to avoid an effective double taxation of the same asset in real terms, potentially reintroducing the subject of indexation relief into the debate.

Statements concerning taxation are based on our understanding of the taxation law in force at the time of publication. The levels and bases of, and reliefs from, taxation may change. You should obtain professional advice on taxation where appropriate before proceeding with any investment.

 

This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. 

Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.

This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.

All data contained within this document is sourced from Cazenove Capital unless otherwise stated.