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Capital Gains Tax indigestion

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Not much distracts me from the nightly episode of Masterchef but just as Greg Wallace tucked into contestant number 2’s cannon of lamb with a hint of raspberry jus the Office of Tax Simplification’s report into Capital Gains Tax hit social media.

It’s a weighty document – 135 pages in total. Does it tell us anything we already didn’t know? – probably not, given the disparity between income tax rates and capital gains tax it was always likely that a Chancellor-commissioned review would lead to a conclusion that there was a disparity and that rates should be aligned. Note the ‘aligned’ reference – it doesn’t actually say that the current rate of 20% will be doubled.

Will it fill the fiscal hole left by the Covid 19 crisis? – again probably not, as, in reality, capital gains tax is paid by relatively few taxpayers and even the OTS acknowledges that taxpayers may avoid it by simply changing their behaviour. If you don’t sell anything then you don’t pay it ! Having said that there may always be the unintended bounce back of increased CGT takings simply because taxpayers have brought forward transactions to avoid the higher rates – you only have to look back at 2008 and taper relief to see the race to complete corporate finance transactions in March 2008.

Will it change behaviour? Quite possibly – and if that means that speculative short-term windfall gains are taxed at rates closer to income tax then it’s fine with me, as, in my opinion, that sort of behaviour leads to uncertainty in the marketplace.

What should I do now? Well, Its certainly worth a conversation with your usual BHP contact.

If you intend to make a disposal in the next few months, it absolutely makes sense to complete this before the March Budget, as, in doing so, you’ll achieve certainty over both the rate and timing of your capital gains tax liability – we are already working with a number of business owners, looking to protect their position in an uncertain world, and to extract family value from their business in the most tax efficient fashion.

If you’re not intending to sell, then it’s still worth having the conversation, particularly in relation to shares in your trading company, as the report makes some sinister references to reviewing the position in relation to “accumulation of retained earnings in smaller owner managed business.”, something that the government have previously confirmed as being acceptable.

That discussion may also advance your IHT planning, as the report includes reference to removing the normal capital gains uplift on death, and in any case we already have the expectation of significant IHT reforms following the All Parliamentary Party Report way back in January 2020.

Is there any good news in there? – well actually, yes. We may possibly be welcoming back indexation allowance in the form of a rebasing to 2000 – in my conversations with our Private Client team, many individuals are looking to pass on family assets, but are precluded from doing so, simply because of the inflationary gain that has built up over the years. It also goes on to recommend a more flexible use of capital losses which currently are ringfenced to future capital gains.

Anyway, back to contestant number 3 and a hibiscus infused zabaglione!