Government Review Urges Major Overhaul of Capital Gains Tax
Throughout the pandemic outbreak of Covid 19 during 2020 there has been much speculation around how HM government will manage the soaring deficit.
Unprecedented government spending to combat the coronavirus has sent the accumulated borrowing for the first five months of the fiscal year to almost £174bn. The highest level for the period since the Office for National Statistics records began in 1993 and overtakes the total borrowed in an entire year at the peak of the financial crisis. Britain’s national debt rose above £2tn, or more than 100% of GDP, as spending has soared and tax receipts have collapsed dramatically.
A recent government review urges a major overhaul of capital gains tax in an effort to raise revenue. The Office for Tax Simplification (OTS) report commissioned by Rishi Sunak said that cutting exemptions and doubling rates on Capital Gains Tax could raise £14 billion for the Treasury. Recommendations include a ‘tax raid’ on buy-to-let properties and other forms of wealth.
It notes that the final figure could be substantially less, due to “behavioural effects” such as people choosing to delay the sale of a property. The OTS stressed it was not calling for higher taxes, as setting rates was government policy.
The OTS report acknowledges that cutting exemptions and doubling rates could affect how people approach their finances, stating: ‘The disparity in rates between capital gains tax and income tax can distort business and family decision-making, and creates an incentive for taxpayers to arrange their affairs in ways that effectively re-characterise income as capital gains.’
In September, Mr Sunak reassured Tory MPs there would not be a ‘horror show of tax rises with no end in sight’. Bill Dodwell, tax director of the OTS, said: “If the government considers the simplification priority is to reduce distortions to behaviour, it should consider either more closely aligning capital gains tax rates with income tax rates, or addressing boundary issues as between capital gains tax and income tax.”
The report also urged the Government to consider reducing the £12,300 allowance with a range of between £2,000 and £4,000 being cited.
The maximum capital gains tax (CGT) rate of 28% could be raised by Rishi Sunak closer to income tax rates, where the top rates are 40% and 45% in England and Wales.
Proposals from the Office of Tax Simplification
The proposals are contained in a report from the Office of Tax Simplification, which was asked by Mr Sunak to compare CGT with other taxes and make proposals in order to iron out distortions, in July.
About £8.3bn of capital gains tax was paid in 2017-18, compared with £180bn of income tax by 31.2 million individual taxpayers.
Landlords invested in buy to let in the 1990s for example could be among the most affected by a rise in CGT. However, rather than triggering a CGT charge by selling a buy to let property, landlords may hold on to the property. Alternatively, there could also be a rush to sell before higher CGT rates come in.
The annual CGT allowance, called the annual exempt amount (AEA), could also be adjusted. The allowance means that the first £12,300 of profits from trading in shares and property is currently free of CGT. But the OTS said the government “should consider reducing its level” to between £2,000 and £4,000.
The report said: “The AEA clearly distorted investment decisions. Around 50,000 people report gains annually close to the threshold and so ‘use up’ the annual exempt amount as if it were an allowance – which is particularly easy for holders of listed share portfolios.”
Warning that the government was on track for a £400bn deficit this year, the thinktank said wealth taxes should also be used in response, and that corporation tax should also be increased to raise billions of pounds for the exchequer.
However, it called on the chancellor to delay the task of repairing the public finances until the economy has fully recovered from the pandemic – expected to be 2023 at the earliest – to avoid the mistakes made following the 2008 financial crisis when George Osborne undermined the recovery by launching a decade-long austerity drive.
You can read the Office for Simplifying Tax report in full here.
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