Chancellor Rishi Sunak may have cancelled the Autumn Budget, opting instead for the Winter Recovery Plan, but doubtless he will still be making plans to claw back some of the £190 billion support injected into the economy in response to Coronavirus – and that could potentially mean tax rises.
If that is the case, one tax in his sights is likely to be Capital Gains Tax, particularly as in its manifesto the Conservative Party promised not to raise income tax, National Insurance or VAT. In July, the Chancellor ordered a review into CGT, asking the Office of Tax Simplification to report on how CGT rates compare with other taxes. We await the outcome of this with interest.
So what is Capital Gains Tax?
Usually uttered in the same breath as CGT is property, but it is important to remember that it isn’t only on the sale of second and additional homes that CGT is incurred.
Capital Gains Tax is liable on the sale of a range of assets, including shares and investment funds. If you are a sole trader, or in a partnership, CGT could also apply to business assets, such as land and buildings, or plant and machinery.
Everyone has an annual CGT allowance, which is currently £12,300. If you sell any assets liable to CGT and the profit you make doesn’t take you over the threshold then you have nothing to pay. Also, CGT doesn’t apply if you are selling your main residence.
However, if you are a property investor or landlord, so are selling a second or additional home, then CGT may be liable, and this is calculated on the difference in what you paid for the property and what you sold it for (the profit).
CGT has already undergone one significant change this year; a change was made to when CGT needs to be paid to HMRC. All tax owing now has to be paid within 30 days of completion of the sale. This is a big difference from previously, when the payment did not need to be made until the end of the January after the tax year in which the gain arose.
As for how much you will pay, this depends on whether you are a higher rate or basic rate taxpayer.
In relation to a property sale, if you are a basic rate taxpayer, you will pay 18 percent on any gain you make on selling a second or additional property. If you are a higher or additional rate taxpayer, you will pay 28 percent.
On shares, the rate is 10 percent for basic rate taxpayers, and 20 percent for higher rate and additional rate taxpayers.
So what changes might the Chancellor make to Capital Gains Tax? The two likely options seem to be to reduce the tax-free allowance and/or to raise the rate.
It seems unlikely that CGT will be applied to the sale of a primary residence, as this will surely have a negative impact on the housing market.
In the meantime, now is the time to make use of the current tax free allowance and the CGT rates. Maximising investments in ISAs – which are tax free – also makes sense.
Michael Blaken is accounts director at Optimum Professional Services www.optps.co.uk