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This could encourage the Government to tighten rules in the upcoming Budget to ensure the tax brings in more money.
Higher-rate tax payers should pay a CGT rate of 28% on the sale of residential property or 20% on the sale of other assets such as shares.
In 2019-20, just £9.3bn of Capital Gains Tax (CGT) was paid on gains worth £62.7bn, giving an effective tax rate of 14.9%.
The decrease in the effective rate of CGT paid is likely due to people becoming more aware of the types of reliefs available and making greater use of these.
Ways to reduce one’s CGT bill include:
- Offsetting losses from the same year or an earlier year against the gain
- Using reinvestment reliefs, applicable mostly to business assets
- Using tax incentivised investments, such as Seed Enterprise Investment Scheme, Enterprise Investment Scheme and Social Investment Tax Relief
- Sharing gains with family members, especially spouses, and using the tax free annual exemption
- Claiming reliefs such as Business Asset Development Relief (formerly Entrepreneurs Relief) or exemptions, such as when selling a business to an employee ownership trust
- Maximising the Primary Residence Relief (PRR) which applies to the sale of a taxpayer’s only or main home. So if someone has a second home in a high-growth area, e.g. a flat in London, they can switch this to their main residence to maximise PPR.
The relatively low rate of CGT being paid may mean that the tax could be targeted by the Chancellor in the next Budget on 27 October. A report by the Office of Tax Simplification published in November 2020, recommended that CGT rates be increased to bring them in line with income tax.
The Government will need to approach any rate increase with caution. The majority of CGT is paid by the very wealthy - 41% of the total yield last year was from 2,000 taxpayers who made a taxable gain of £5m or more on assets sold. In the event of an increase, such individuals may choose not to sell their assets.
Graham Boar, Partner in our Letchworth office says: “The decreasing effective rate of Capital Gains Tax paid suggests many investors are making as much use of the tax reliefs as they can. Whilst they are well in their rights to do that, it is impacting HM Treasury’s desire to maximise tax revenues.”
“Clamping down further on some of the CGT reliefs seems a logical next step, as well as looking at the headline rate.”
“The Government is under pressure to raise CGT rates to cover Covid public spending and to fund social care. However, it must be careful not to disincentivise investors from selling their assets. This could see the yield from CGT drop, negating the increase.”
