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UK trusts, tax and estate planning

The prospect of further CGT changes – bad news for taxpayers, homeowners, and business owners?

James Austen considers possible upcoming changes to CGT.

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With the economy still suffering the consequences of the Covid pandemic, the job of Chancellor of the Exchequer is perhaps even more challenging than usual.  Yet even before the pandemic, there were rumours of changes ahead for capital gains tax (CGT).

It was widely predicted that the Chancellor wished to make eye-catching spending commitments in the March Budget before the pandemic became the priority.  In usual circumstances, the Chancellor’s ability to increase spending would be constrained given the state of the public finances, the Government’s commitment to balancing the budget (more on this later), and the so-called “triple lock” in its Manifesto, i.e. a promise not to increase income tax, National Insurance Contributions (NICs) or VAT.  This all means that an increase in CGT receipts – perhaps including restrictions on (or the abolition of) Entrepreneurs Relief – could provide the scope he needs to fund spending commitments elsewhere.

And so it came to pass, as Entrepreneurs Relief was cut to £1m (controversially, with retrospective effect) and re-branded as Business Asset Disposal Relief in the March Budget.

Since then, the UK economy has suffered a Covid-related downturn of 20% – the largest slump on record.  Though the economy has bounced back and came out of recession in the last quarter, hopes of a V-shaped recovery have been dampened by resurging rates of infection and increasing restrictions through the Autumn. As a result, and as the Office of Budget Responsibility reported in July, “…at some point, given the structural fiscal damage implied by our central and downside scenarios, the longer-term pressures on spending, and the range of fiscal risks we identify, it seems likely that there will be a need to raise tax revenues and/or reduce spending (as a share of national income) to put the public finances on a sustainable path.”  Leaving aside ambitions to announce popular spending projects, the Chancellor is likely to need some solution to the rocketing levels of government debt.

But the Government’s election Manifesto commitment to the tax “triple lock” presents it with an unforeseen problem: how to raise taxes to restore sustainable public finances without breaking its promise?

The recent recommendations of a CGT review commissioned by the Chancellor might point to at least part of the answer.  Unlike income tax, NICs and VAT, CGT is not subject to the “triple lock” and the Chancellor could increase the tax take without the Government backtracking on promises.  The review by the Office of Tax Simplification (OTS) has recommended that rates should increase and the annual allowance decrease.  Specifically, the OTS suggests bringing CGT rates in line with income tax rates.  This could see the highest rate on CGT hitting 45%, far above the current 28% ceiling on residential property and 20% on other property.  Even if rate increases are more modest, it seems clear that a significant increase is on the horizon.

So who might CGT increases affect?  The truth is that no-one knows yet: all the published commentary on the subject is just crystal ball-gazing, which is more- or less-well informed.  Nevertheless, an educated guess would indicate the following:

  • Homeowners – the CGT carve-out on the sale of main homes (“principal private residence relief”) costs the Exchequer £26.7bn at current rates, according to the National Audit Office.  That cost would increase if headline CGT rates were to rise, of course.  Whilst undoubtedly unpopular, scrapping the relief would be simple to achieve.
  • Business owners – the rump of the Business Asset Disposal Relief could be removed so that the headline CGT rates (whatever they might be – see below) will be charged on the sale of a business.
  • UK taxpayers disposing of assets standing at a gain – if the headline CGT rate increases (to align it with income tax, possibly) then the overall tax take would instantly increase.
  • Non-UK residents – UK properties are already subject to tax for “non-doms” and those not resident in the UK.  In theory, it would be relatively straightforward to extend this treatment to all UK assets (though in practice enforcement might be tricky).
  • Estate beneficiaries – at present, capital gains accruing during a person’s lifetime are wiped out on death.  This is for a good reason: it has always been accepted that Inheritance Tax and CGT should not be charged at the same time on the same asset – otherwise there would be obvious double taxation (or, indeed, triple taxation if the funds used to acquire the asset in question had already been taxed to income tax in the first place).  But there have been calls to remove this treatment so that lifetime gains would eventually fall to be taxed to CGT even if the capital value of the asset has already been subject to IHT.

The timing of any increase to CGT rates remains a mystery.  With the cancellation of the November budget, we are left to speculate on the Chancellor’s intentions.  The pandemic has made predictions very difficult, not least for the government itself.  Much may depend on the speed of any vaccine roll out and how restrictions are managed moving forward.  The start of the 2021/22 tax year (and the assumed Budget to go with it) may prove to be a turning point.  Though it seems unlikely that significant changes will be made before then, it may be sensible to begin planning for them sooner rather than later.  It remains to be seen whether any changes will come with retrospective anti-forestalling provisions designed to levy the higher rates of tax on disposals made before the changes are announced.  One would have thought not (assuming the Government to be concerned with the rule of law, including certainty in tax provisions), but the recent changes to Entrepreneurs Relief, which were retrospective, are perhaps a salutary reminder that the possibility should not be discounted.

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James Austen

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