What can I do to prepare for possible changes to Capital Gains Tax?

What’s happening?

With the latest Budget less than a month away, speculation is rife over rumoured changes to capital gains tax!

It was only a couple of months ago that the Office of Tax Simplification (the OTS) released their report on suggested changes to Capital Gains Tax (“CGT”) and this was a real shot across the bow.

The recommendations put forward by the OTS included:

  • Aligning CGT and Income Tax rates or addressing “boundary issues” i.e. whether an item is to be treated as a disposal for CGT purposes or a profit for Income Tax.  The obvious example highlighted in the report is Share Based Remuneration – particularly for employees.
  • The possibility of introducing a new form tax relief to cover inflationary gains, which just seems to be little bit of history repeating.
  • Looking at the interaction between tax position of companies and individuals.  Is this an attack on Family Investment Companies?
  • Considering reducing the number of CGT tax rates (currently four) and to stop the CGT rate being dependant on the income tax rate of the taxpayer.
  • Reducing the CGT annual exemption, which is currently only £12,300.
  • Removing the CGT-free uplift on death.
  • Replacing Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief) with a relief more focussed on retirement.
  • Abolishing Investors’ relief.

In summary, the mood music is moving us ominously toward a less generous tax environment for capital investment and entrepreneurship. 

What can I do to prepare?

To prepare for the proposed changes, there are a number of things you can consider, such as:

  • Use your CGT annual exemption for the current year as soon as possible and if you are married, ensure your spouse’s is used too!  It is a relatively modest amount but ‘use it or lose it’.
  • Equalise investments and push assets to the lower earning spouse.  If CGT rates change then this will help to shelter the income and gains at lower rates.  The biggest risk here is divorce so careful planning is recommended.
  • Accelerate any plans to sell.  It might be a bit late but if you are in the process of selling a business or any other valuable asset such as a property then the best advice might be to simply get it done before the Budget.  The Chancellor has been known to introduce changes from the date of his speech or to introduce anti-forestalling rules to prevent people trying to “move” a CGT disposal date. 
  • Consider greater use of tax-free wrappers such ISAs.
  • Increase pension contributions and use your pension fund to make your investments.  This has the added benefit of providing IHT protection in the right circumstances, albeit few will be surprised to learn that this is another area that the Government is looking at.
  • Use tax efficient investments such as EIS and VCT.
  • Consider the use of a Family Investment Company (“FIC”) to shelter income and gains at lower tax rates. Please click here to see our blog on FICs though this is an area that HMRC is also potentially looking at so careful planning is required.
  • Move to warmer climes!  Not an option for everyone but doubtless one that many will be seriously considering…

Final thoughts

Let’s not kid ourselves.  CGT is one of the smallest taxes in terms of income to the Treasury but, together with IHT, it is often a hot political topic.

CGT and Income Tax planning can take some forethought and careful planning as well as time to implement.

If you are worried about tax changes and would like to discuss what planning could be undertaken to help mitigate this then please contact us.

About the author

Pete Heslington is a Chartered Tax Advisor (CTA) and Trusts and Estates Practitioner (TEP). 

Pete’s expertise crosses many sectors and taxes.  He focuses on bespoke tax planning and structuring covering corporate tax, mergers and demergers, acquisitions and sales, exit and remuneration planning, share schemes, partnership taxation, investment planning, wills and probate.

You can contact Pete here.