A review commissioned by UK Chancellor Rishi Sunak has recommended a tax increase for business owners, people with second homes and workers involved in share schemes, among others.
Up to £14 billion could be raised to better fund public services and plug the gap in the nation’s finances caused by the Covid pandemic. This could be done by making adjustments to Capital Gains Tax (CGT), according to the Office of Tax Simplification.
The report argues that a reduction in the annual allowance for CGT and an increase in the rates would help generate much-needed revenue for the Exchequer, and reduce incentives to avoid tax.
The report notes that “most gains are concentrated among relatively few taxpayers” and the current system “can mean that they pay proportionately less tax on their overall income” than standard taxpayers.
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What is Capital Gains Tax?
CGT is effectively a tax on the increased value of an asset over time, payable when the asset is sold or passed on.
So if an asset, like a buy-to-let home, increases in value by more than a certain amount over a period of time, then an amount of tax will be payable on the increased value when it is sold.
Primary homes are exempt from CGT, and there’s a threshold of £12,300 gains on anything else, below which you currently aren’t liable to pay the tax.
The rates of CGT on gains are 10 per cent for basic rate taxpayers and 20 percent for higher rate taxpayers, which is around half the rate of income tax. However, CGT is charged at 18 per cent and 28 per cent for basic rate and higher rate taxpayers respectively on gains from residential property.
Who would have to pay more?
According to the report, “broadly, those paying CGT are business owners (for example, holding shares in an unquoted trading company) investors (people holding buy-to-let property, second homes, or a share portfolio outside a pension or ISA) employees (those participating in share schemes).”
In 2017/2018, CGT was paid by just 265,000 individuals, generating £8.3 billion in tax revenue, compared with £180 billion paid by 31.2m individuals in Income Tax.
If the government was to lower the threshold for CGT to around £5,000, then approximately twice the number of people would be liable to pay it - just over half a million.