The Office for Tax Simplification (OTS) has suggested that £14 billion could be raised if the Chancellor were to bring capital gains tax (CGT) rates in line with income tax. We’ve heard this sort of thing before – is there any reason to be concerned this time round?
CGT – recent history
The current CGT system includes an annual exemption for gains not exceeding £12,300 in aggregate. Above that, taxpayers are charged at 10% to the extent that their gains do not exceed their remaining income tax basic rate band, and 20% on anything above that. If the asset the gain is crystallised on is residential property (or certain specialist investment gains), these rates are increased to 18% and 28% respectively. However, it was not so long ago that the rates were significantly higher.
In fact, before 6 April 2008 there was a single rate of 40%, which is equal to what was then the top rate of income tax. So, the move suggested by the OTS wouldn’t be unprecedented. However, it would mean that current planning based on the 10%/20% rates could become ineffective overnight.
Example. Biff has retired and is in receipt of pensions that mean his income is just below the higher rate threshold, and has built up excess profits of around £150,000 in Chipper Ltd, his sole director shareholder trading company. This has not actively traded for many years, and instead the money has been sitting slowly accruing interest in the company.
Biff took advice recently, and was intending to use a liquidation to extract the funds in the summer of 2021 as a capital distribution and to buy a holiday flat by the coast. His accountant advised him that after taking into account liquidation fees of approximately £5,000, he would keep around £118,000 after CGT at 20% (taking into account his personal allowance). If the changes suggested by the OTS were implemented on 6 April 2021, Biff would have considerably less – approximately £92,000.
Protective measures now?
In Biff’s situation there is a straightforward solution – just action the liquidation now before any potential changes take place. However, not all circumstances will be so straightforward. For instance, investors with diversified portfolios might be sitting on large losses due to the coronavirus. It also may not be possible to simply decide to sell assets at the drop of a hat, for example with sales of property.
Tip. Shareholders could consider crystallising their position as a protective measure. However, it is important to remember that if shares in the same company are repurchased within 30 days, the sale will be matched to that purchase, and the historic share acquisition price will still prevail for CGT purposes.
For example, if Bob holds 100 shares in A Ltd that he paid £1,000 for and sells them today for £20,000, the gain is £19,000. However, if he repurchases 100 shares tomorrow for £20,000 he will be treated as making a gain of £0 for CGT purposes, and his “new” 100 shares will inherit the £1,000 base cost for any future disposal. This would make the protective sale useless, as any increase in CGT rates would hit the whole £19,000 gain.
A possible solution to this would be for Bob’s spouse to reacquire the shares instead, as the rules do not then bite.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.