Property owners face paying tens of thousands of pounds more in CGT

Buy-to-let landlords, investors, those with second homes, and small business owners face paying significantly more in capital gains tax under new proposals put forward yesterday.

Rishi Sunak

The government’s tax adviser has recommended that capital gains tax be overhauled with proposals that could see the number of people hit by the duty increase sharply.

Rishi Sunak, who commissioned the review, is considering proposals by the Office of Tax Simplification (OTS), a Treasury-based body, to reform capital gains tax in the light of the economic and fiscal impact of the Covid-19 crisis.

The move has the potential to bring in an extra £14bn by reducing exemptions and doubling rates, according to the review.

The OTS concluded current CGT rates were too complex, and suggested that the government bring them closer in line with the rates of income tax.

CGT is currently charged at 10% and 20% for most taxable assets, or 18% and 28% for residential property that is not a main home. Income tax is charged at rates of 20%, 40% and 45%.

Inheriting families would also pay more under the review’s recommended changes, which included abolishing the so-called ‘CGT uplift’.

The Institute for Public Policy Research, a think tank, estimates that the government could raise an additional £90bn over five years if the CGT proposals were implemented.

More than 275,000 people paid a total of £9.6bn in CGT in 2018-19.

But the proposals made by the OTS when it comes to CGT rules have been described as “dangerous and are a far cry from tax simplification” by Nimesh Shah, CEO at tax and advisory firm Blick Rothenberg.

Nimesh Shah

He said: “They [the proposals made by the OTS] contain a dangerous set of proposals to radically reform capital gains and are a far cry from simplification.

“The standout headline is the proposal to simplify CGT by aligning it to income tax rates. Is this really simplification, when the income tax system itself is complicated with various spikes and cliff edges in play? This is just a roundabout way of presenting an increase to CGT.”

Shah insisted that he is “disappointed” by the conduct of the OTS in its handling of this review, which, he said, “only serves to increase the tension around higher taxes, when it should be aimed at simplification”.

The tax expert believes that the OTS is straying into matters of tax policy rather than recommendations on simplification.

He continued: “The proposals contained in the report serve to complicate the existing CGT regime, rather than simplify it. Some of the areas that would be open to simplification, such as the computational aspects and operation of certain reliefs [such as main residence relief], are not considered in any detail.

“The other proposals include reducing the annual exemption, abolishing Business Asset Disposal Relief [the £1m successor to Entrepreneurs’ Relief introduced at Rishi Sunak’s first budget] and Investors’ Relief, as well as removing the capital gains base cost uplift on certain assets upon inheritance following a person’s death.”

As a basic example, an individual who is an additional rate (45%) taxpayer realising a capital gain of £500,000 on the sale of a property would pay an additional £85,000 in tax, according to Shah.

A pensioner who is a basic rate taxpayer selling some quoted shares realising a capital gain of £10,000 would see their tax bill double to £2,000. These examples assume the personal allowance and capital gains annual exemption are fully utilised elsewhere.

He added: “The simplest CGT regime would involve a single flat rate, which is what we had in 2008/09 and 2009/10 when there was an 18% rate of CGT. There are currently five different rates which could apply, and this is the main point which needs to be addressed, and disappointingly isn’t considered in the OTS report.

“Any such radical reform of CGT needs to be coupled with an equal reform of Inheritance Tax – one should not be altered so dramatically without consideration to the other.”

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9 Comments

  1. Andrew Stanton Proptech Real Estate Strategist

    Luckily, the OFT is anything but able to simplify the tax maze that exists, and as it is a feasibility report, rather than a statute, I think this type of taxation is a long way off.It is natural with the huge sums of money being pumped into the financial system, that the ever smiling populist chancellor will be looking at a plan B to balance the books.But my thoughts are ‘unpopular’ headline tax interventions, even if they hit only a fractional amount of people, can do a huge amount of damage, as there is always an equal reaction to circumvent any known change to tax rules.

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  2. AlwaysAnAgent

    An excellent way to discourage people from investing in U.K. assets, whether it be property or shares. Germany and France have average CGT rates of 25% and 30%, and we already pay more tax on dividends compared with these two countries and numerous others. Welcome to high tax Britain.

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  3. Property Poke In The Eye

    Its pay back time.

    Any new tax collection policies will be a bit painful for a few years.   No other way to do it.

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  4. JMK

    The purpose of the OTS is to make it simpler to collect tax, not to understand it, agree with it, or it to be an equitable system.

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  5. JamesB

    Anyone with assets is going to pay for the U.K.s year off where most of the country have spent months on the sofa

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  6. Robert_May

    Rishi Sunak is punishing  the prudent

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  7. James White

    Market killer

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  8. LVW4

    An easy target! You could sell e.g. shares to avoid being hit in the first round, but what then do you do with the cash to avoid being hit again? BTL has already been taxed out of the sector and this really would be the final nail in that coffin. As for your home, you can’t simply dispose of your assets to avoid being hit. This will impact younger homeowners as they move up the ladder, but if this does become reality, I can see pensioners selling up and moving into rented accommodation (hopefully, for the next 7 years at least!). Nothing about higher rate pension contributions… yet!

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  9. paulgbar666

    2nd property owners should be under no illusions Govt is coming for the CG of those 2nd properties.   The reason!?   Cos that is where the money is!!   This will be in the form of equity in SE properties mostly caused just by inflation. But irrespective of how the CG has occurred the Govt wants a bigger piece of it than it currently gets.   Increased CGT WILL occur. Time to sell up if you are thinking of selling up in the next 10 years.   Do it now as prices are going nowhere for the next 10 years. Staying you would just be the fatted calf waiting to be slaughtered for all that lovely equity you have in additional properties. Properties are the easiest to tax as they don’t tend to have the ability to MOVE! So easily traceable. There would be very little empathy from the general public if 2nd property owners are hit for more CGT.   Significantly many of them will be LL. You can bet your bottom dollar that LL WOULDN’T receive ANY empathy whatsoever from the general public if they are hit for more CGT. No certainly not a vote losing tax except perhaps LL votes. It is as plain as the nose on anyone’s face that Govt intends to hit those with additional properties with higher CGT. Just as Dillinger was asked why he robbed banks and his reply was that was where the money was the same for 2nd properties for Govt to rob the equity cos that is where the money is to rob. It is principally LL that will be hit by this increased CGT even though they already payer a higher CGT than other 2nd homeowners. Is it really worth retaining a rental property which will only make so much yield in the next 2 years when the CGT will be far more than that yield? I suggest NOT. So sell now and avoid the increased CGT hit. For those foolish LL that believe they won’t be hit by more taxes I say wake up. It is clear that the PRS is to be burdened by more costly regulations and taxes. Plus you can’t even get rid of rent defaulting tenants.   With the inability to get rid of rent defaulting tenants in a timely fashion which is scheduled to be made even more difficult by Govt with the abolishing of the AST and S21 the PRS has had it’s day especially those mortgaged LL. We are returning to the days of sitting tenants. Most LL would be better off giving up on single household lettings. Don’t think you could have a sitting tenant in a HMO though I could be incorrect. Maybe with a house LL just let to single unrelated tenants. Guess this could be done for a 4 bed house so avoiding Mandatory HMO licensing. But who knows what new tenancy regulations are coming?  All I know is it will be bad news for LL. Time for LL to change their business models perhaps!?

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