The Institute for Public Policy Research (IPPR) recently released a report on potential changes to capital gains tax (CGT) and income tax in the UK to provide for a more progressive tax system. The report proposes that CGT should be abolished and that capital gains should be covered by income tax.
Rates
Currently, there are four separate CGT rates for individuals:- (1) 10% where the gain is covered by the basic rate band; (2) 20% to the extent that any part of the gain exceeds the basic rate band; (3) 18% where a gain is made in respect of residential property and is covered by the basic rate band; and (4) 28% to the extent that any part of the gain on residential property exceeds the basic rate band.
As recent as 2008, the top rate was 40%. Therefore, the current rates are relatively low.
The IPPR's proposal would mean taxing gains at 20% for basic rate taxpayers, 40% for higher rate taxpayers and 45% for additional rate taxpayers. The IPPR also proposes changes to income tax, including re-introducing the 50% rate and this could then impact CGT.
Removal of Annual Exempt Amount
The existing CGT regime provides individuals with an annual exempt amount of £12,000 which exempts part of the gain from tax.
The IPPR notes that individuals who make earnings through work and capital gains pay a lower average rate of tax against individuals who only make earnings through work due to the CGT annual exempt amount. As such, the IPPR proposes that the annual exempt amount should be replaced with a de minimis allowance (suggested at £1,000).
Removal of Entrepreneurs' Relief
Entrepreneurs' relief can be claimed in respect of gains made on the disposal of businesses. Where entrepreneurs' relief is claimed, gains are taxed at 10%. Individuals have a lifetime entrepreneurs' relief limit of £10 million.
The IPPR comments that there is a lack of evidence to show that this relief has made an impact on entrepreneurship and notes that it has faced criticism for being "expensive, regressive, and ineffective".
If entrepreneurs' relief is removed, gains on the disposal of businesses would be subject to the usual CGT rates.
Removal of Exemption at Death
The existing CGT regime generally provides that CGT will not be payable on death. Moreover, for calculating future gains on inherited property, the date of death value is used for the acquisition cost (as opposed to the price paid by the deceased during lifetime). The IPPR proposes that this tax free uplift should be removed and that CGT could be payable at the time of inheritance or when the asset is sold.
Conclusion
The existing regime for CGT is relatively generous. The IPPR's proposals for reform highlight that this is an area of tax that could face an increase in rates and a reduction in reliefs in the future. Those considering succession and tax planning may wish to act now to make the most of the existing regime.
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