Accountants warn that “sudden and dramatic” changes to Capital Gains Tax could distort taxpayers’ behaviour and affect the housing market

12/11/2020

St Albans-based accountancy firm, WMT Chartered Accountants, has warned that changes to Capital Gains Tax (CGT) recommended to Chancellor, Rishi Sunak, by the Office for Tax Simplification (OTS) could distort taxpayers’ behaviour and affect the housing market if their implementation is “sudden and dramatic”.

The OTS report has recommended that the Chancellor considers bringing rates of CGT into line with Income Tax or addressing “boundary issues” between CGT and Income Tax.

The report also advocates wide-ranging reductions in reliefs and allowance, less generous treatment of gains from inherited assets and reducing the threshold from £12,300 to just £5,000.

Andrew Williamson, Managing Partner at WMT Chartered Accountants, said: “There are some aspects of the CGT regime that do perhaps need reform, and the Government clearly is keen to find ways to increase taxation revenues.

“We are, however, concerned about the unintended consequences.”

He added: “Any change to the taxation system and how that impacts the UK property market will cause ripples across the economy.

“People may sell property early before the change is introduced, or be reluctant to sell after the change is introduced.

“Either way, the housing market could be distorted and it may not be beneficial to those wishing to get onto the housing market if people owning second homes, or buy-to-let properties are reluctant to sell them due to higher tax levels.”

Andrew also cautioned that the economic impact of any changes to CGT could go beyond the housing market, with business owners potentially also being less likely to sell.

“Typically, when businesses are acquired, the new owners invest into them and also inject new energy and drive. This is good for the economy.

“Having businesses ‘die on the vine’ slowly and be operated as a ‘cash cow’ is not going to create the dynamic, entrepreneurial economy we need to be able to compete in a post-Brexit world,” said Andrew.

CGT is levied at 10 per cent for basic rate taxpayers and 20 per cent for higher or additional rate taxpayers on gains from the disposal of assets worth £12,300 (£6,150 for trusts) or more at market value, including most personal possessions worth £6,000 or more, shares and business assets.

Property that is not a person’s main home and main homes that have been let out, used for business or which are very large are also subject to CGT but at 18 per cent for basic rate taxpayers and 28 per cent for higher or additional rate taxpayers.

Basic rate taxpayers must pay CGT at the higher rates on the value of any gains above the higher rate threshold of £50,000 a year.

Moving CGT in line with Income Tax would mean that basic rate taxpayers would pay 20 per cent of gains, rather than 10 or 18 per cent. Higher rate taxpayers would pay 40 per cent on gains, rather than 20 per cent or 28 per cent. Additional rate taxpayers would pay 45 per cent on gains, rather than 20 or 28 per cent.

Meanwhile, reducing the threshold from £12,300 to £5,000 would mean many more taxpayers would be subject to CGT and those who would already have to pay CGT would have to do so on a greater proportion of their income from disposals.

Should the Chancellor opt to implement recommendations from the report, it is likely that they would particularly affect landlords, small business owners, investors and second home owners.

The OTS report will add fuel to mounting speculation that CGT could be in the Chancellor’s sights, potentially as soon as the next Budget, as he looks to plug the hole in the public finances following the Coronavirus crisis.

Andrew said: “It looks likely that at least some of the proposed changes will be implemented in some form in the coming years.

“People who are considering disposing of assets that could be caught by such changes in the medium to long term may wish to consider whether an early disposal could be worthwhile.

“Although the overall economic outlook is highly uncertain, there are areas where asset prices and market conditions have remained buoyant.”