The Office of Tax Simplification (OTS) has published its report relating to the design and principles underpinning Capital Gains Tax (CGT). In it, the OTS has made suggestions for the Government’s consideration, which include aligning CGT rates with the higher rates of Income Tax.

Back in March, we shared a blog about the proposals from a similar report, regarding the future of inheritance tax (IHT). We also speculated in August about what action the Chancellor might take to start to plug the gap in our national deficit, given the extensive financial measures that have supported the COVID-19 crisis.

While it’s becoming ever more likely that there will have to be some significant tax changes at some point, it remains to be seen whether the Government will act on the suggestions in the OTS report. While the OTS hasn’t made specific recommendations, it has offered the Government some measures to consider.

The suggestions most likely to be of interest to our clients include:

  • Aligning CGT and income tax rates. Currently, CGT ranges between 10 and 28%, whereas income tax is up to 45%. If this proposal was to be implemented, then most people who pay CGT could expect their bill to increase,
  • Reintroducing relief for inflationary gains. Indexation relief was abolished several years ago, so this would help to reduce the amount of taxable gain particularly on long-held assets,
  • Addressing CGT and income tax boundary issues. This includes a suggestion that share-based rewards arising from employment and accumulated retained earnings in smaller companies may be taxed at income tax rates. This could be bad news for many smaller owner-managed businesses, particularly where they are investing to grow,
  • Reducing the annual exempt amount for CGT (currently £12,300),
  • Removing the CGT uplift on death where an exemption from IHT on death applies (for example, trading companies), meaning that the person inheriting does so at the original base cost, and
  • Replacing business asset disposal relief (formerly known as entrepreneur’s relief) with something more focussed on retirement.

It’s worthwhile remembering that this report only makes suggestions for consideration and some of the proposals would be a radical change from the current regime.

What should you do?

Planning can be difficult at the best of times and until we know for sure what, if anything, is going to change, there is no simple answer. However, if you have a significant capital asset that you are thinking about realising, it really is worth spending some time exploring your options and getting the right advice. Start a conversation with Kate Naylor by email or call 0113 297 6825.

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Kate Naylor
Kate Naylor

Business Tax Partner

Kate spends a lot of time working with businesses and their owners on tax strategies and mitigation, which includes looking at the business and its structure, through to the owners personal tax situation and their longer term goals and plans.

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