Despite the spotlight on capital taxes ahead of the Spring Budget, the event turned out to be a bit of a damp squib.
True, there were some positive announcements for individuals and businesses. The income tax rate was maintained and business-rate holidays were kept in place. Capital allowances were increased and deductions enhanced.
But all told, there was little for private clients to concern themselves with. The Chancellor may be keeping his powder dry for when we emerge more fully from the pandemic, and the economic recovery gathers pace.
When that time comes, Rishi Sunak will surely turn his attention to the UK’s capital tax regime.
The factors driving the need for capital tax reform haven’t gone away. Indeed, Sunak recently wrote to the Office of Tax Simplification recognising its work in this area. And he’ll be watching how the US electorate reacts to President Biden’s proposed increases in Capital Gains Tax (CGT), and income tax for the wealthiest.
So I think we can be confident that change is coming for capital taxes – quite possibly in the Autumn Budget.
Anticipating the impacts
Our tax team has been looking at how our private clients might be affected by changes to CGT or inheritance tax (IHT), or the introduction of a wealth levy.
You can read more about this in our Changing Face of Capital Taxes guide. But in a nutshell, here are the main potential impacts on four key groups:
1. Entrepreneurs, shareholders, senior management and private equity funds
- A CGT rate rise would drive higher tax liabilities when selling shares or assets.
- Restricting Business Asset Disposal Relief (previously Entrepreneurs’ Relief) to retirement could see individuals pay additional tax of up to 10% on exit.
2. Family businesses and family offices
- Higher capital tax rates, and the abolition or change in qualifying conditions of business and agricultural property reliefs, may penalise the transfer of a business to the next generation. The effective tax rate payable could jump from 0% to 40% on the value of the business.
- Increased CGT rates, or the abolition of IHT reliefs, could adversely impact both the sale or gifting of property.
4. Investors and those with accumulated personal wealth
- A rise in CGT rates would mean more tax payable on the disposal of assets such as shares.
- A one-off wealth tax at 0.01% to 5% on personal assets (potentially including shares) worth over £500,000 may force individuals to sell assets in order to meet the tax liability.
- Where IHT relief is unavailable as a result of abolition of condition changes, the tax rate on the transfer of assets to the next generation would rise from 0% to 40%.
Planning for capital tax change
Most high net-worth individuals will fit into one or more of these categories. So my advice is: start thinking now about what changes to capital taxes could mean for you, your family and your business.
If you are likely to be affected, I’d recommend having an initial conversation with your tax advisor and as a starting point carrying out a tax review of your will, to assess how your beneficiaries could be affected and reviewing your assets to identify any that could be impacted by a change.
An increase in the CGT rate might make certain asset disposals more attractive in the short term.
Trusts can be a particularly effective option for two key reasons. They can offer a tax-efficient way to transfer wealth to the next generation; and they can protect what the beneficiaries may do with that wealth.
Moving assets into a trust often crystalises a tax charge and whilst this may seem counter-intuitive doing so at a time when tax rates are historically low and tax relief(s) may be available can be a useful tool prior to certain events, such as a sale by an individual of their business.
A word of caution, however: trusts are complex to administer. Therefore, I recommend to get technical support from experts for this.
On the property front, meanwhile, the prospect of a CGT hike comes at a time of booming house prices. And there are major reforms to the property tax landscape on the radar. These go beyond personal taxation, and promise positive and negative implications – for landlords, developers and landowners.
Potential changes to be aware of include:
- a Property Developer Tax on gross profits of large corporate development firms
- enhanced capital allowances for corporate landlords on certain qualifying spending
Already in place is the new, 30-day reporting and payment requirement for CGT. This is catching people out – and there are stringent financial penalties for missing the deadline.
You should of course seek advice on any of these issues. The capital tax regime is complex; you’ll need an expert view of what any changes mean for your business, and your personal tax situation. The KPMG tax team is on hand to take you through the implications, and help you plan ahead.