Continuing with our tax theme, there have been some changes mooted on Capital Gains Tax (CGT) recently. The Institute for Public Policy Research (IPPR) issued a report in September, Just tax: Reforming the taxation of income from wealth and work.
Part of the reform the IPPR is proposing is that capital gains should be taxed at the same rates as income, and some form of indexation relief should be introduced in order that gains equivalent to the rate of inflation are not taxed. With indexation being abolished in 1998, this feels like déjà vu, although taper relief is still available on assets owned in the period from 1982 to 1998.
Gains were first tied to the rates of income tax more than 30 years ago but let’s hope taper relief will not be making a comeback because the calculations were far more complicated than they are now.
The new rates of tax proposed would apply to all income and capital gains and would be a combination of both Income Tax and National Insurance, although again this is nothing new.
The bringing together of the two regimes under one set of rules provides not only a degree of simplification, but the current National Insurance scheme is deemed to be out-dated and not fit for modern working practices. However, the major step with this proposal is the idea that it will cover not just earned income, but also capital gains, interest, dividends, and pensions.
The proposed combined rate of tax would start at a lowly 2% for income and gains over £8,600 (just below the current primary NIC threshold), rising gradually to 50% at £100,000. Under this structure, for income alone, the IPPR estimate that 80% of taxpayers would be better off, but the remaining 20% – those with income of over £44,800 – would be the losers.
Not such good news
As part of the proposals the annual exemption for capital gains, currently £12,000, would be scrapped, though a de minimis allowance (suggested as £1,000) would be put in place in an attempt to reduce reporting requirements to a practical and manageable level.
Added to this, gains on all fixed interest bonds would be included; thus the current exemption on qualifying bonds and gilts would be lost. Additionally, Entrepreneurs’ Relief and Enterprise Investment Scheme relief would be abolished.
Even worse is that the CGT exemption on death would be removed. This recommendation is again nothing new, with the Office of Tax Simplification (OTS) Inheritance Tax review, ‘Simplifying the design of the tax’, published in July, concluding that the interaction between Inheritance Tax (IHT) and CGT is complex and can distort decision making.
Under current rules, where an exemption or relief applies from IHT (for example, business relief, or agricultural property relief, or where the spouse exemption applies), any capital gain is wiped out on death of the owner of the asset, and it could be sold just after death without either IHT or CGT arising.
The OTS takes the view that this deters people from passing on assets during their lifetime, but it does not take account of the fact that some people cannot afford to do that anyway.
Whilst not a dramatic change, the OTS has concluded that this distortion would be best addressed by amending the CGT rules so that where a relief or exemption applies to an asset for IHT, the person who inherits that asset gets it at its original base cost.
One bit of positive news is that the IPPR is considering that the Principle Private Residence Relief should remain.
We have a general election looming and the result of that may have a bearing on these proposals. Let’s hope that the winning party will be too busy with Brexit to make any decisions on CGT too soon.
Here at UNIQ Family Wealth, we endeavour to keep an eye on any gains on investments with us that you make throughout the year. Do get in touch if this is a concern for you.