The Chancellor has set the date of his Spring Budget as 3 March 2021 which is very early in the usual window of Spring Budget dates that always take place on a Wednesday in March. Chancellors often favour St Patrick’s Day (17 March) with the most common date being 21 March. In fact since 1953, no Chancellor has set a Spring Budget this early.
As well as being an early Budget, the 2021 Budget could also be one in which significant capital gains tax changes are announced – or at least such a rise has been an area of much speculation, and not without foundation. The Office for Tax Simplification published its report at the end of November with, among its recommendations, a closer alignment of CGT with income tax rates.
Alistair Darling chose an early date for his 2008 Spring Budget on 12 March, following an Autumn Statement in the previous October. As many will remember, in October 2007, the Chancellor announced that with effect from 6 April 2008, taper relief would be abolished and replaced with a flat rate of CGT at 18%. Business Asset Taper relief, introduced in 1998, gave a 10% CGT rate for business assets including shares in a personal holding company (i.e. a company where you own more than 5% of the share capital and were an officer or employee of the business). Otherwise the headline rate of CGT was broadly aligned with income tax rates at 40% which could be tapered down to 24% for non-business assets once you owned the asset for 10 years.
For those expecting to pay 10% tax on a future disposal of a significant asset abolition meant a near doubling of the effective rate and Alistair Darling had given almost 6 months notice. This generated a flurry of activity in the transactions market and lead to record breaking receipts of CGT for the tax year 2007/08. The Office of National Statistics show that the CGT receipts for 2007/08 were £7.7bn compared with £5.4bn the prior year. It then fell to £2.5bn for 2008/09, perhaps also due to falling asset prices at the time, but it could be argued that the change advanced rather than enhanced the CGT take.
Present day and CGT receipts have risen to higher revenue levels, reaching £9.1bn in 2018/19. However, while this is a higher absolute number than at the time of Alistair Darling’s Budget, CGT now only represents 1.5% of total tax receipts in 2018/19 compared to more than 5% in 2007/08, suggesting that a rate increase (for CGT at least) when pre-announced can lead to be a temporary increase in tax revenues that are sustained in the medium term.
Against this, however, must be balanced the impact of the Laffer curve which suggests increases in tax rate can give rise to lower economic activity and therefore a lower overall tax take. This is particularly important at a time when the economy is fragile and likely to be sensitive to any additional shocks. For all those who rush to dispose of assets ahead of any possible tax rise, there will be others who choose to hold onto their assets, hoping to ride out any rise in capital gains tax rates and waiting for a fall in future. The Adam Smith Institute argue that a sudden tax increase of this nature leads to a sudden fall in CGT revenues as taxpayers change their behaviour and hold on to assets – one of the characteristics of CGT is that taxpayers often (but not always) have a choice about the timing of the disposal. This would be particularly unwelcome at a time when asset values are already depressed by the uncertainty caused by world events.
An alternative to simply increasing tax rates is to couple a rise with an increase in allowances targeted at specific assets. We saw this in the Coalition Government’s Emergency Budget on 23 June 2010 with the then Chancellor George Osborne. CGT rates were increased with immediate effect from 18% to 28% for higher rate taxpayers but Entrepreneurs’ Relief (first introduced in 2008 by Alastair Darling) was increased from £1m to £5m also with immediate effect. Here the effect was not a drop in the CGT revenues which the laffer curve might predict, instead in 2010/11 UK CGT revenues in fact increased to £4.4bn (up from £3.4bn in the prior year) which shows that sudden increases with targeted reliefs and allowance can be mitigated by targeted relief and can even increase CGT revenues in the right circumstances. Although it is hard to determine how much a return to growth after the 2008 crash might also have influenced asset values and therefore tax take.
So, would increasing CGT rates raise more revenue? The Wealth Tax Commission’s report suggests that aligning CGT with income tax rates could raise an additional £12bn of CGT every year. Bearing in mind that CGT revenues are currently c£9.5bn, this would be a substantial increase but would still make it less than 3% of overall tax receipts (assuming no other changes to other taxes). Still not at the same 5% level as in 2007/08. In practice, the percentage tax take is likely to be part of a dynamic and changing picture in terms of the contribution of consumption, property, transaction and profit based taxes all of which are likely to have been affected by recent events
What do other countries do and in a post-Brexit world how would the UK compare? Direct comparison with other countries is always tricky because although you can compare the headline CGT rates for example 33% in Ireland, 23% in Spain, c30% in the US, 25% in Germany, up to 45% in Australia etc without looking at the entire package of how an individual is taxed on all their income and gains as well as the reliefs and allowances available, the answer is distorted. For example, Switzerland has no CGT but has higher income tax rates, cantonal taxes as well as local church taxes on top of an annual wealth tax on worldwide assets for Swiss residents. Therefore, looking at CGT rates in isolation doesn’t necessarily give a fair global comparison. However, these headline rates, considered in isolation, might suggest that the UK’s current rates are lower than in many other developed nations.
So can we expect Rishi Sunak’s announcement to hold an early Spring Budget to be another Budget with significant CGT changes? Recent history shows us that there are a number of ways that changes to effective rates of CGT can be implemented – changes to the headline rates, the introduction of, or changes to existing reliefs and allowances and pre-announcements of future tax changes. At the time of writing, media speculation seems to favour no significant changes or announcements in relation to capital gains tax in this Spring Budget especially in light of the third lockdown. Although how buoyant the economy is and therefore the Chancellor feels may depend on the speed with which the vaccine programme proceeds. What we do know is that the Chancellor commissioned the Office of Tax Simplification report which recommended a rate rise, and indeed that he specifically asked them to look at rates. So even if the Chancellor does not make any announcements on CGT on 3 March 2021, I expect that CGT reform is on his agenda before the next election in 2024.