CGT: Capital Pains

As the public spending review 2020 drew to a close on Thursday 26 November, the dire reality laid bare by the Chancellor in terms of an impending “economic emergency” should alarm the taxpayer. With government borrowing hitting £394 billion for the year and the UK economy forecast to contract by 11%- the biggest decline in national output for over 300 years-Mr. Sunak is increasingly looking for ways to stabilise fiscal finances. It’s currently estimated that by the time the next election comes calling in 2024, government deficit could still be an eye-watering  £30 billion.

Both the Chancellor and Prime Minister have vowed to avoid returning to austerity by cutting government spending, hinting towards bridging the gap in government finances through raising taxes.

Whilst the Chancellor refused to be drawn on fiscal policy, many believe a potential Capital Gains Tax(CGT) rise is on the way-particularly for the affluent. Suggestions have been put forward to the Chancellor to align the CGT rate more closely with income tax rates as well as abolishing the CGT allowance of £12300. At present high-income tax payers pay 20% on gains made relating to sale of assets held for more than a year-excluding property, a breakdown of treatment on sale of which is made in our previous blog-whilst being taxed 45% on income. In contrast, basic income tax payers pay 10% CGT whilst being taxed 20% on their income above the income tax annual allowance of £12500

This implies those intending to dispose of any long-term assets must do so soon with government spending  and debt expected to continue to balloon further, providing additional impetus to raise tax rates to bring public finances on a firmer footing. However, the treasury perhaps needs to account for the fact that individuals are likely to modify their behaviour such as selling the asset in instalments to remain underneath the tax-free allowance. Abolishing the tax-free allowance could delay sale of assets but also adversely impact those who earn a living by selling investments-the rationale behind reduced tax rates on CGT compared to income tax.

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