Your questions about the potential Capital Gains Tax changes in 2021
In this article, we will try and answer the following questions about the potential Capital Gains Tax changes that have been suggested by the Office of Tax Simplification (OTS).
– Will Capital Gains Tax change in 2021?
– What is the capital gains allowance for 2021?
– What will the Capital Gains Tax rates be in 2021?
– Does capital gains count as income?
– Will I need to pay Capital Gains Tax on my home?
– How do I avoid paying capital gains on a second home?
– Do you pay capital gains if you reinvest?
Will Capital Gains Tax change in 2021?
You may be interested in our main article on Capital Gains Tax rates and allowances. You may also be interested to know how more about our services to help reduce your Capital Gains tax liability when you sell a buy to let property investment.
In July 2021 Rishi Sunak the chancellor of the exchequer requested the Office of Tax Simplification (OTS) a review of the capital gains tax system.
Rishi Sunak wanted the OTS to focus on
– Review of the administration process of Capital Gains Tax payments
– Review of the technical aspects of how Capital Gains Tax is calculated, which in his view changes the behaviour of the taxpayer
The technical aspects refer to how people carry out their investments plans in order to benefit from the reduced rate of Capital Gains Tax compared to Income Tax.
There is very much a focus of Rishi Sunak and the OTS to create a greater alignment between Capital Gains Tax and Income Tax to create fairness across the UK population.
It is fair to say that the Capital Gains Tax review – first report: Simplifying by design proposes a number changes to the current Capital Gains Tax system.
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What is the capital gains allowance for 2021?
Going forwards I will now refer to Capital Gains Tax as simply CGT. I will also refer to the Office of Tax Simplification as OTS.
One of the recommendations made by Bill Dodwell – OTS Tax Director was to remove or at least reduce the CGT annual allowance, which is currently £12,300.
The current CGT annual exemption of £12,300 means that one person can sell an asset and not have to pay CGT on any gains of this amount, or less than this amount.
A couple would then be able to double this up. Couples and civil partners could make a capital gain of £24,600 without having to pay CGT at all.
This is one of the reasons why our property tax specialists advise their clients to use a deed of trust to move assets from one person to the couple to utilise two lots of annual CGT exemptions.
However, as can be seen in the report that Bill Dodwell was keen to reduce the annual CGT exemption or remove it altogether.
This means that you would potentially pay income tax or capital gains tax on the greater value of the gain than in previous tax years.
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What will the Capital Gains Tax rates be in 2021?
We need to be mindful of the terms used in this article and in particular for the UK tax bands that are used for basic rate taxpayers, high rate taxpayers and additional rate taxpayers.
A basic rate taxpayer is someone that earns less than £50,000 for the tax year 2019/20. A high rate taxpayer is someone that earns above this amount to £150,000. An additional rate taxpayer is someone that earns more than the £150,000 specified amount.
The Capital Gains Tax rates for 2019/2020 is 10% for basic rate taxpayers if they sell non-residential assets. This is increased to 18% CGT rate for basic rate taxpayers if they sell residential property investments.
The CGT rates for high rate taxpayers is higher as you would expect The Capital Gains Tax rates for 2019/2020 is 20% for high rate taxpayers and additional rate taxpayers if they sell non-residential assets. This is increased to 28% CGT rate for basic rate taxpayers if they sell residential property investments.
Bill Dodwell – OTS Tax Director suggested that CGT and income tax should be aligned. This suggests that the CGT rates would be scrapped and replaced with the income tax band when you sell assets.
This would certainly change the entire landscape of tax when selling assets.
This would suggest that
– Basic rate taxpayers would not pay the 10%/18% CGT rate but a 20% income tax rate.
– High rate taxpayers would shift from paying a CGT rate of 20%/28% to 40% income tax.
– Additional rate taxpayers would pay 45% income tax bands instead of the 20%/28% CGT tax rate.
What would the CGT proposed changes mean for basic rate taxpayers?
The income tax band for a basic rate taxpayer is 20%. This would suggest that there would be an increase of 10% tax when selling non-residential assets. There would be an increase of 2% if the taxpayer sold a residential asset.
UK landlords may be forgiven to think that they are not losing out by selling a residential property investment with a 2% increase in tax. However, we need to be mindful of two things
– The CGT annual exempt amount will be reduced or scrapped meaning that £12,300 is potentially going to be taxed at 20% when selling a residential buy to let property. This is an effective tax increase of £2,460.
– The amount of money you earn is added to the gain that you make. Given the average salary in the UK is circa £25,000 then it would only require a gain of more than £25,000 to push a taxpayer into the high rate tax band.
What would the CGT proposed changes mean for high rate taxpayers?
The income tax band for a high rate taxpayer is 40%. This would suggest that there would be an increase of 20% tax when selling non-residential assets. There would be an increase of 12% if the taxpayer sold a residential asset.
– The CGT annual exempt amount will be reduced or scrapped meaning that £12,300 is potentially going to be taxed at 40% when selling a residential buy to let property. This is an effective tax increase of £4,920.
– The amount of money you earn is added to the gain that you make. This could mean that some people will have a capital gain taxed at the 45% income tax rate. 45% tax on a gain of say £10,000 is £4,500 compared to £2,800 if the CGT rates remained unchanged. This is an effective increase in tax of £1,700
Will I need to pay Capital Gains Tax on my home?
At the time of writing (tax year 2019/20), you do not have to pay CGT if you sell a home that you have always lived in. This is because you will benefit from the CGT tax relief Private Residence Relief.
Albeit there has been a number of suggested changes by the OTS, there was no mention of changing the rules around CGT and selling your main home residence.
How will Capital Gains Tax changes affect inheritance tax planning
One thing is for sure. If you change one tax, you affect another.
People make gifts to loved ones to pay Capital Gains Tax that ranges from 10% to 28% rather than pay Inheritance tax on death at 40% if the estate value exceeds their IHT lifetime allowance.
There could be a knock-on effect on IHT planning if Capital Gains Tax is changed to be more in line with income tax.