Chancellor ‘walking on a knife edge’ with Capital Gains Tax

Chancellor ‘walking on a knife edge’ with Capital Gains Tax

There has been an 18% increase in CGT in the last year alone

Chancellor ‘walking on a knife edge’ with Capital Gains Tax

The Chancellor may not realise that he is “walking on a knife edge” as any major increase in CGT rates may cause wealthy families and entrepreneurs to leave the UK, according to Praveen Gupta, UK Head of Tax at Azets.

CGT receipts have increased by over 100% in the past five years and reached a record level of £18bn in the last year alone, and a further 18% increase from the previous year.

Katharine Arthur, partner, and head of private client at Haysmacintyre believes the 18% spike over the last year is a “sign of the times”, with many investors having exited the buy-to-let sector over the past year, and inflation causing house prices and asset values to soar.

Gupta echoes this view saying in times of high inflation, CGT can simply be a tax on inflationary growth rather than real gains.

“We would like to see the introduction of reliefs to give a measure of inflation proofing to offset inflationary trends,” he adds.

Jeremy Hunt announced in the 2022 Autumn budget the level of CGT annual exemption will be reduced from £12,300 to £6,000 from April 6, 2023. Additionally, the exemption would be reduced further to £3,000 the following year.

ONS data published in August 2022 highlights that in 2020/21, 45% of CGT came from those who made gains of more than £5m. This group represents less than 1% of taxpayers. These are often the key wealth creators in society.

Any major increase in CGT rates may cause wealthy families and entrepreneurs to leave the UK and become residents in jurisdictions with a more favourable tax regime,” says Gupta.

The full effects of the alterations to CGT from the Autumn Budget are yet to be fully seen, says Arthur.

“We are seeing some of our clients streamline their portfolios in advance of the reduction to the CGT annual exemption rate in April, a mood which is reflected across a range of investors,” she adds.

“Whether they decide to hold or sell, and how HMRC stands to benefit, may not be revealed until January 2024.”

On the point of streamlining, Gupta says individuals would usually hold shares in their relevant entity, and by default this often puts them into the Business Asset Disposal Relief regime, but benefits from this have now significantly reduced.

“For business owners, there is little choice over streamlining their business ownership structure,” he adds.

Spring Budget 2023 

CGT tax cuts now look unlikely in the Spring Statement, especially after the reduction to CGT annual exemptions over the next two tax years were announced last year, says Gupta.

Gupta warns against any increase in the rate of CGT because “entrepreneurs need to be given strong incentives to grow new businesses, to encourage the creation of wealth and new jobs, especially in high-tech sectors.”

“In the past year alone, we have seen more significant tax changes and U-turns than ever before, which have all played into wider uncertainty,” says Arthur.

Both clients and advisors desire a simple and stable tax system and Arthur says making any more changes to CGT will make the process more complicated.

 

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