Whilst the country was coping with the Covid19 pandemic The Office for Tax Simplification (OTS) was reviewing Capital Gains Tax AND Inheritance Tax !
In the resulting reports the OTS made an array of recommendations which will not only simplify the tax system BUT also mean a LOT MORE tax is paid….and paid by a LOT more people. Ouch !
WHO IS MOST LIKELY TO BE AFFECTED BY THESE POSSIBLE CHANGES?
The people who would most likely to be affected by these possible changes are those with:-
- Share portfolios
- Business owners considering selling part / all their business
- Rental properties
- Assets that are worth considerably more than the original purchase price.
WHAT ARE THE RECOMMENDED CHANGES?
With the Government looking to collect as much tax as possible to pay off all the debt racked up during the pandemic, I’d be amazed if many of the following key recommendations on Capital Gains Tax (CGT) and Inheritance Tax (IHT) are not implemented at some point….
1 Annual CGT Allowance Cut
Reduced down to £2,000 from the current £12,300.
This would mean a lot more sales transactions will be subject to CGT.
2 CGT Rates Rise
The CGT rates would be the same as income tax rates (ie 20%, 40% or 45%).
This would be a big rise as the 4 main CGT rates range between 18% and 28%.
3 Entrepreneur’s Relief scrapped
A business owner who sells 5% or more of the shares in their company (& meets all the other qualifying criteria) pays just 10% CGT on the first £1m of gain.
This possible change is likely to affect anyone who is considering closing down their company. That’s because when this happens Entrepreneur’s Relief could also be claimed if the remaining profits is extracted via a capital distribution rather than dividend which means a lot less tax is paid.
4 Various Inheritance Tax changes
Annual gift exemptions (including personal allowance of £3,000 per year) –could be scrapped
Business property relief – could be scrapped
Annual Inheritance Allowance (up to £500,000 per person) – could be scrapped and replaced by an annual lifetime transfer of wealth amount
5 Removal of tax free uplift on death
This is probably the biggest of all the recommended changes.
The current rules mean that when someone dies all their assets are revalued to their market value before then being transferred to their beneficiaries.
For most people this revaluing of the assets is likely to mean that there is NO Capital Gains Tax AND NO Inheritance Tax being payable.
This change would stop that with possibly a lot of tax suddenly becoming payable on assets in someone’s estate which have risen a lot in value.
WHAT COULD YOU DO?
Remember these are only recommendations and we have yet to hear what the Government will do.
BUT I suspect when politically safe to do so, we’ll hear that changes will be made to Capital Gains Tax and Inheritance Tax.
The good news is that anyone who might be affected by these changes does have time to organize their affairs to minimize future capital gains tax and inheritance tax bills.
Some possible things to consider (but you should take advice before actioning) ….
1 Sell assets that you’re considering selling sooner – this ‘uses’ up the Annual CGT Allowance and any CGT is paid at lower CGT rates
2 Gift and Loan Trusts set up – some of your assets are transferred into the Trust – you would have access to the assets if you needed the cash BUT any increase in the asset value sits outside of the estate and not be taxed.
3 Discounted Gift Trusts set up – some of your assets are transferred into the Trust – whilst you receive an ongoing income from those assets you don’t have access to it and the amount of IHT payable is reduced.
4 Transfer all /part share in assets to your spouse – splitting the assets means that all tax free annual allowances are fully used.
SO WHAT NEXT…?
Capital Gains Tax and Inheritance Tax are taxes which can be largely avoided AS LONG AS someone’s financial affairs are well organized.
I’m expecting many of the OTS recommendations to be implemented SO it’s important to review your assets (property, shares, pensions, etc) and make sure they are well structured.
I’d recommend that this is done sooner rather than later so that you have enough time to avoid future tax bills by making any changes BEFORE the next BUDGET.
If you think these changes might affect you and you’d like our opinion and help please get in touch straightaway. Call us on 0161 410 0020 or email [email protected]
