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Key points
- History of government meddling with capital gains tax.
- Its role in the wider tax take for the UK at present.
- The issues of a narrow base of those liable.
- What will the future hold in the Autumn budget?
Against the backdrop of the Covid-19 pandemic and the resulting public spending seeking to keep the UK economy on life support, the government announced on 14 July that capital gains tax, as it applies to individuals and small businesses, was to be reviewed by the Office of Tax Simplification (OTS) (see tinyurl.com/otscgtcfejul).
Economic imperative
The perceived problem for the government is that public spending must be paid for, yet in the current environment tax rises are difficult: most decisions on tax have an effect on the behaviour of taxpayers. In some cases, tax hikes are designed to seek to create behavioural changes, such as increasing duties on tobacco or alcohol – so-called sin taxes. But increases in the major raisers of revenue for the Treasury, such as income tax (forecast at £208bn), VAT (forecast at £161bn) and National Insurance (forecast at £150bn), would all affect aspects of the economy that are febrile. The fiscal impact of the coronavirus has been felt on demand and supply within the economy, together with a significant risk of high levels of unemployment as the government’s employment and business support packages are phased out.
This leaves the government scrabbling for other sources from which revenue may be raised, without affecting the elements of the economy that need protecting. Taxation is a deeply political matter and any government will want to ensure that whatever is done from a taxation viewpoint does not alienate voters who are within its grasp.
There are, however, two competing points on the politics of tax rises. On the one hand, we are still early in the current parliamentary term and usually governments tend to raise taxes in the early years and announce giveaways before an election. On the other, the government will be looking over its shoulder at the possible re-emergence of what voters might perceive to be a credible Labour party. This, it is suggested, is the context in which capital gains tax and capital taxation generally is being looked at.
Loud but unimportant
Capital gains tax has always been a political football but, equally, quite unimportant in terms of the revenue that it raises: £8.8bn was raised in the 2017-18 tax year (inheritance tax raised only £5.228bn for that year). When taxes are changed, there is a tendency for governments to adopt a ‘back to the future’ mentality; it is therefore worth seeing where we have come from to predict what might come to pass.
For several years, until 1988, capital gains tax had been charged at a flat rate of 30%. From 1988 until 2008, gains were taxed at income tax rates, but with taper relief reducing the gain. In 2008, a flat rate of 18% was introduced. This was changed again from 2010 so that gains were usually taxed at 18% for basic rate income taxpayers and 28% for higher rate taxpayers. A final reduction came in 2016 for non-residential property gains to 20% or 10% for basic rate taxpayers – which remains the system we have now.
Yet the tax base for both capital gains tax and inheritance tax is very small. Fewer than 300,000 people paid capital gains tax in 2017-18. The base is smaller still for inheritance tax: in 2016-17, there were about 28,000 deaths on which this tax was paid – 4.6% of deaths for the year. Increases in rates for these taxes will not expand the tax base. So, there is every reason to believe that capital gains tax will be looked at – together with inheritance tax – from a viewpoint of widening the base so as to increase revenue.
Tax breaks may not last forever
It would be entirely unsurprising for some sacred cows to be slaughtered to achieve this – for example, the tax breaks provided for a person’s main residence or for individual savings accounts. From an inheritance tax viewpoint, the reliefs provided for business and agricultural assets must be within the government’s sights, together with the way capital taxes interact. These include the capital gains tax uplift of assets to their market value at death, which even when no inheritance tax is payable, must be called into question.
The holy grail of any chancellor faced with the need to raise taxes must be to do so without affecting employment and with minimal impact on the supply and demand aspects of the economy. The ‘simplification’ of capital taxes linked to a broadened tax base will surely be too tempting.
OTS questionnaire
The OTS’s survey provides some indication of the areas that are likely to be subject to scrutiny.
Questions include: are there situations where you are liable to capital gains tax on the sale of the family home? Do you have more than one home? Are you a business owner? Are you aware of entrepreneurs’ relief and relief for gifts of business assets?
Of course, any review of capital gains tax is likely to be all-encompassing, but it is highly probable that fundamentals will be reviewed. The abolition or at least significant paring back of the capital gains tax annual exemption would not be surprising, together with a return to the direct equivalence of capital gains and income tax rates.
We are left in the situation where a crucial budget is expected in November. This might be too early for major reforms, but there is every reason to believe that capital taxation will not be easing – and it is, of course, not unprecedented for there to be in-year changes to capital gains tax. Anyone who is looking for certainty should consider what action should be taken now to enable clients to ‘bank’ the current system before it is targeted.
