The future of capital gains tax

Learning Objectives:

• To understand how much capital gains tax (CGT) contributes to the overall tax yield.
• To understand the history and current position in relation to CGT.
• To understand what the future of CGT might look like.
• To be able to apply all of that understanding to delivering informed advice.

The future of CGT

The starting point for considering the future of CGT is the present together with an understanding of it’s history.

At around £18 bn forecast for the 2023/24 tax year, CGT is not a huge tax revenue generator, well not compared with the big four – income tax, National Insurance, VAT and corporation tax.  It is, however, forecast to rise steadily over the years to £26.1 bn in 2027/28 not least because of the reduced annual exemption and frozen tax thresholds.

Self-evidently, capital gains (along with reinvested income of course) are, however, an important contributor to the growth in the value of investments.  Of course, the gains are only “real” when realised and that’s when CGT needs to be considered.  It has a direct impact on the net value the investor receives from their investment – assuming of course that what they have invested in is a chargeable asset for CGT purposes.  Most investments that financial advisers advise on, direct and collective, outside of a pension, ISA or investment bond wrapper would be.  That group of potentially CGT chargeable investments includes direct equities, discretionary portfolios, unit trusts, open ended investment companies and investment trusts, all of which could be held on or off platform.

So, where we are now - the present?  Capital gains realised on those chargeable investments that exceed the (substantially reduced) annual exception (currently £6,000 and falling to £3,000 next year) will be subject to tax at 10% to the extent that they fall below the threshold above which higher rate tax is payable and 20% to the extent they fall above it.  So, in determining the tax rate applicable to capital gains, broadly speaking, the non-exempt gains are sat on top of taxable income.  It’s important to remember that, under the law as it has stood for some years and as it stands at present, the death of the owner of chargeable assets is deemed to give rise to a disposal on a “no gains/no loss” basis.  This means that there is no CGT payable on death, whoever inherits, and the “inheritor” inherits at the market value on death for the purpose of measuring future taxable gains.

So, that’s where we are now.  The past has seen us experience: indexation relief, taper relief, various reliefs for gains made on disposing of qualifying business assets (the current version is business assets disposal relief), an annual CGT exemption (recently reduced - see above), the taxation of capital gains (in effect) as income from 1988 until 2008, and a few “special flat rates” since then.

And, throughout all of this time, there has been the following (among some other “constants”):

• (as described above) a tax free “revaluation” and effective uplifting of the base value for calculating future capital gains on the death of an investor;
• a gift of a chargeable asset to a connected person being treated as a disposal at market value for CGT;
• a disposal to a spouse or civil partner being deemed to be at no gain/no loss, so the done effectively takes over the donor’s acquisition value for the purposes of calculating future gains on a disposal by them*.

*For disposals up to 5 April 2023, this includes the year in which the couple separate.  

However, following a recommendation from the Office of Tax Simplification (OTS) that the ‘no gain no loss’ window on separation should be extended beyond the year of separation the Government introduced new provisions that provide that, for disposals occurring on or after 6 April 2023, separating spouses or civil partners be given up to three years after the year they cease to live together in which to make no gain or no loss transfers; and no gain or no loss treatment will also apply to assets that separating spouses or civil partners transfer between themselves as part of a formal divorce agreement.  Outside those limits, where the parties have not lived together in the tax year of the transfer, CGT could be payable.  The transfer is normally treated as made at market value because the spouses/civil partners are still connected persons until the final order (decree absolute).

With the upcoming general Election in 2024, the future of CGT is something that advisers may be asked about.

In November 2020, the OTS also suggested, among other things, that capital gains should be taxed in the same way as income; some form of indexation should be reintroduced and there should be an end to the tax free value uplift (revaluation) on death.

None of these proposals were adopted.

The Shadow Chancellor, in a recent interview with the FT, stated that Labour had no plans to tax capital gains as income and, at the Labour Party Conference in October, it was reported that, in private discussions, Sir Kier Starmer and Rachel Reeves have said that they will not be putting in the Labour manifesto any tax rises beyond that already trailed.  As a reminder these are:

• Levying VAT on private school fees and making the schools liable for business rates (but not removing charitable status);
• Reforming non-domicile tax treatment; and
• Ending the CGT treatment of carried interest.

Despite its relatively low yield in the overall scheme of things, it’s well worth managing CGT through thoughtful planning incorporating.

• asset ownership;
• utilisation of exemptions and allowances; and investment wrapper choice.

All remain important contributors to achieving tax alpha for individual investors, so as to maximise the net rate of return on investment.

Advisers (where appropriate, working with their client’s other advisers) have a key role to play in delivering this value in the fulfilment of their key responsibilities under the Consumer Duty Rules.

Right now, we have an Autumn Statement and a Spring Budget to “look forward to” and with that and, more importantly, the manifestos of the main parties, we should get a clearer indication of the direction of travel that could be adopted.

Given the material economic challenges facing whoever is in power and, along with bringing down inflation and interest rates and the importance of growth and its encouragement in the economy, it would be surprising if material CGT reform were near the top of the “tax agenda” for Labour, the Conservative or the Lib Dems.  But we can’t rule it out in the future.