Government Fundraising using Capital Gains Tax and Inheritance Tax
Rishi Sunak has called for the Office of Tax Simplification to have a look at Capital Gains Tax with a view to a report being presented later this year. This has sparked rumours in many circles that the Chancellor is looking for a way to raise money from Capital Gains Tax and to make changes to the law in time for the new financial year.
Capital Gains and Inheritance Tax Reports
In the last 12 months there have already been two reports on Inheritance Tax which, might pave the way for some changes designed to increase the take of that tax. However those of us who read the reports in detail, will also have noted that they both highlighted what were perceived as “inconsistencies” in the interaction of Inheritance Tax and Capital Gains Tax which it was felt were caused, in part at least, by the availability of certain Capital Gains Tax reliefs. The authors of both reports felt that these reliefs distorted taxpayers’ behaviour and facilitated very large-scale avoidance of the tax.
The principal point that the two report’s authors were making was that what is commonly called the “free Capital Gains Tax uplift on death” meant that many estates were managing to avoid both Inheritance Tax and Capital Gains Tax when the original intention of the legislators was always that only one of these taxes should be paid on death, rather than both taxes be avoided.
On the back of these recommendations one cannot help thinking that any report into Capital Gains Tax may well recommend amendments to the Capital Gains Tax free uplift on death.
The other major area where Capital Gains Taxes come in for criticism is the fact that it is charged at a much lower rate than income tax. The basic rate of Capital Gains Tax is 10% with 20% being paid by higher rate taxpayers, tax on gains from the sales of residential property which are not eligible for the Principal Private Residence exemption is at 18% or 28%. These rates when contrasted with the rates of income tax of 20% 40%and 45% seem odd and have always been a focus of potential tax planning.
Comment has also been raised about the Principal Private Residence exemption and over the course of the last few years successive governments have actually tightened up on the rules relating to this. One suspects that whatever might or might not be recommended by the Office of Tax Simplification the abolition of the Principal Private Residence exemption would be political suicide, as such I cannot imagine that the Chancellor would ever remove that exemption on any transactions during an owner’s lifetime.
Can we plan ahead of any changes?
This all leads the question is there anything that we can do to plan in advance should the Chancellor choose to make changes? At this stage we cannot see any obvious planning opportunities should changes in the law come into effect. There are plenty of long-established Capital Gains Tax planning routes which should be pursued and this is particularly so in the case of married couples where it is possible to transfer assets from one to another without Capital Gains Tax consequences, something which for the present nobody seems to have suggested might be attacked. This ability to move assets backwards and forwards should be used to try and ensure that each party to a marriage is able to maximise his or her Capital Gains Tax allowances.
There is probably also an argument for looking at the possibility of seeing if there is any way of triggering potential Capital Gains Tax events so as to use up any existing allowances which may be carried forward.
Sadly, these don’t offer a great deal of scope for action at the present time. At Herrington Carmichael we will continue to watch developments carefully and also to keep an eye on any possible actions that could be taken to mitigate the tax.
For further information, contact a member of the Private Wealth team.
This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.
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We are solicitors in Camberley, Wokingham and London. In 2019, Herrington Carmichael won ‘Property Law Firm of the Year’ at the Thames Valley Business Magazines Property Awards, ‘Best Medium Sized Business’ at the Surrey Heath Business Awards and we were named IR Global’s ‘Member of the Year’. We are ranked as a Leading Firm 2020 by Legal 500 and Alistair McArthur is ranked in Chambers 2020.