The Covid-19 pandemic has caused shockwaves around the world, with financial recovery plans drawn up by most countries in the wake of national lockdowns and plummeting economic output. The UK is no different, with the Treasury ordering a review of Capital Gains Tax (CGT) to see how a change to the tax could make it more efficient at generating revenue for the public purse.
The Office of Tax Simplification (OTS) published its plan in November 2020 and included a number of recommendations for changes to the CGT rules, such as:
- Reducing the Annual Exempt Amount by between £2,000 and £4,000 (currently set at £12,300)
- Aligning CGT rates more closely with Income Tax rates
- Removing the Capital Gains uplift upon death
- Abolishing Investors’ Relief
The chancellor didn’t outline a CGT increase in his Spring Budget, but many expect it to come under review over coming months. The government’s ‘Tax Day’ policy documents even outlined a future Finance Bill where CGT may well be upped.
Even if other changes are made to the CGT rules in the meantime, it’s unlikely that the current annual exemption will remain frozen at £12,300 when it expires in 2026. That’s why it’s crucial that clients, particularly expats who may be planning on a return to the UK, understand the implications of any possible changes.
Increasing demand for advisory services
If the OTS recommendations come to fruition and a reduction or removal of the annual exemption is carried out, there are likely to be numerous implications. For a start, if the exemption were to be removed or even just reduced, more taxpayers would fall into the scope of CGT and would face a higher tax bill. However, this could mean demand for advice is likely to grow as people seek support with adjusting their finances and assets to maximise their tax efficiency.
While we don’t know for sure that the changes proposed in the review will go ahead, if CGT rates do increase in the build-up to 2026, it’s likely that more people would look to sell assets, or significantly alter their portfolio. Again, this could mean demand for advisers and accountants may be set to grow.
In February, HM Revenue and Customs published its latest tax receipts data, which showed CGT receipts were the highest they had ever been, at £7.6bn for the 2020/2021 tax year, and £10.4bn when looking at the most recent calendar months. With exemptions reduced or removed, government CGT tax take could be billions, providing a much-needed boost to public finances. While not yet set in stone, it’s conceivable that cost-saving measures will be taken on CGT.
Planning ahead to get the most benefit
Any potential changes to the CGT rules will have huge implications for both clients and their advisers. As such, helping clients to prepare for these changes, and addressing any concerns they may have, will be incredibly beneficial in client relationships.
Forward planning is key in this respect, so advisers should make sure their clients are looking at their financial affairs 12 to 18 months ahead of time. The steps needed to ensure they come in under the adjusted annual exemption, for example, could take a significant amount of time. The more planning that takes place, the better the outcome for clients; if they don’t want to face an alarmingly high tax bill, adjustments may need to be made to their portfolios and other assets.
Saying that, it’s important to understand how they can make the most of capital losses, as these can reduce the total taxable gains. In many cases, it makes more sense to hold onto some assets standing at a loss, which is where professional advice can make a big difference. For instance, married couples benefit from a combined CGT annual exemption of £24,600. Advisers should aim to ensure all allowances are fully maximised where applicable.
The impact on returning expats
The unfortunate combination of Brexit and Covid-19 is causing many British expats to return to the UK, and they’re a group that could face significant tax bills once back in Blighty. Returning expats can face a great deal of red tape, creating considerable tax implications. One role advisers can play in helping clients is by taking away some of the stress caused by the process of moving back to another tax jurisdiction.
When looking at releasing assets, clients need to consider a combination of factors before they decide when to make changes. For example, if they plan to sell their existing home then principal private residence (PPR) relief might apply to their situation as it would protect them fully or partially from CGT, depending on their individual circumstances.
However, if they have UK property to sell, selling it as a non-resident might be better in some instances. Individuals need to have due regard for CGT rules where they’re currently living prior to deciding when would be best to sell. Neither Hong Kong nor Dubai, for example, have CGT regimes which might provide CGT saving opportunities.
Expats looking to return to the UK will already be facing complex financial implications and having professional support to help smooth the transition with advice and reassurance will make a huge difference to their experience. In one way or another, it seems likely that the CGT rules will change over the course of the next few years, so anyone concerned how it may impact them should first consider professional support to better understand the next steps when it comes to their financial strategy.
By Max Porter, private client director at ATC Tax.