When the Coronavirus had a stranglehold over the UK back in March, emergency economic measures were put in place, such as the furlough scheme, to protect businesses and individuals alike. Chancellor Rishi Sunak spent billions to protect the country and ensure that there would be a relatively healthy economy for us to work in once this pandemic was over, and people’s lives got back to normal.
However, these investments in public safety came at a price and, with a vaccine recently approved and ‘normal life’ expected to return around the middle of 2021, attention turns to how the government intends to pay for the measures that were taken back in March. One of the ways we expect the Chancellor to pay for it is by increasing Capital Gains Tax. Therefore, in today’s blog, we’re going to be learning more about Chancellor Sunak’s plans and how it might affect businesses, taxpayers and the rates of Capital Gains Tax (CGT).
Before we get started, if you have any questions about CGT, and how our team can help you, please get in touch with us today. We work with plenty of businesses in the north-west, in areas such as Liverpool, Manchester, The Wirrall, and Bolton, so no matter where you’re based, we can help. Call us on 0161 399 0121 if you work in the Greater Manchester area or 0151 303 3112 if you operate in the Liverpool region.
What Is Capital Gains Tax?
Before we go into the potential changes to Capital Gains Tax, let’s first recap and look at what capital gains tax actually is. Essentially, Capital Gains Tax is the tax on the profit of a recently sold asset that has increased in value over time. Crucially, Capital Gains Tax refers to the gain you make, not the amount you receive for the asset.
Capital Gains Tax Example
Let’s say you buy a watch in 2010 that was worth £1,000 and you sell that watch ten years later for £3,000. You have made a taxable gain of £2,000. Currently, the taxable rate for chargeable assets is 20% for higher rate taxpayers, so you would be charged £400 in Capital Gains Tax, leaving you with £1,600 profit. You only pay Capital Gains Tax on gains above your annual tax-free allowance, which is currently £12,300 in 2020/21. For investment property, Capital Gains Tax rates are slightly different, basic-rate taxpayers pay 18% with higher-rate taxpayers paying 28%.
The Biggest Shake Up In Capital Gains Tax… Ever?
With that established, let’s take a look at the potential changes in Capital Gains Tax that could occur in 2021 and how that might impact people and taxpayers. It has been rumoured that capital gains are due for a shakeup to help plug the nation’s finances. These rumours were backed up by the publication, in November, of two reports by the Office of Tax Simplification (OTS) which gave a list of recommendations that relate to capital gains. If implemented it would see the biggest shake-up to this scheme for nearly three decades.
So, What Did The OTS Reports Recommend?
- There should be a greater alignment between capital gains and income tax rates.
- Business Asset Disposal, once called Entrepreneurs’ Relief, has been earmarked as something that should be scrapped entirely after being reduced to just £1 million in the most recent budget.
- A huge reduction in the level of annual capital gains exemption, to as low as £3,000 per individual.
- Abolish Investors’ Relief, which is a scheme designed to reduce the amount of Capital Gains Tax on shares that aren’t listed on the stock exchange.
- Reducing the amount that employees can benefit from capital gains from the shares, that the company that they work for, give them.
The exact changes to CGT are obviously unknown at this time but we know that any changes to CGT could be applied before 6 April 2021 and therefore our clients need to be ready. To allow you to be in the best possible position, it would be prudent to liaise with Williamson and Croft to discuss whether there is any tax planning that could mitigate the risks that these changes may bring.
The ways of reducing your overall CGT could be:
- Take advantage of the current CGT rates by bringing forward a disposal. For instance, if there is a commercial reason to do so, you could change the structure of your business now, rather than waiting (i.e. incorporating or new holding company).
- Consider offshore structures for holding retained profits and/or other investments.
- Using family investment companies.
- Consider the use of Employee Ownership Trusts; disposal of shares may be exempt from CGT.
- Transfer assets to your spouse before a disposal.
- Utilise any capital losses.
- Staggering disposals to use up annual exemptions in different tax years.
- Deferring capital gains using EIS investments (perhaps only after the new changes come into force) or exempting gains using SEIS investments.
- If able, delaying disposals if the CGT rates equal the income tax rates in order to try and take advantage of lower rates in the future.
Want To Find Out More? Get In Touch With Williamson & Croft Today
Williamson and Croft are available to provide bespoke advice in this regard and we invite you to contact us on firstname.lastname@example.org to discuss your personal situations further to see if we can assist.
As well as CGT, we can help your business with a range of different accountancy practices, from tax and audit work to advisory services. We’ve spent years working with businesses across the UK, and in the north-west, in places such as Manchester and Liverpool. So, if you want to find out more about how we can help do not hesitate to get in touch with us today on 0161 399 0121 if you live in Greater Manchester and 0151 303 3112 if you live in Liverpool or the surrounding areas of St Helens, Salford and Warrington.