Written by Ray Coman
The Chancellor has commissioned a review of Capital Gains Tax from the Office of Tax Simplification. While nothing has been confirmed, the expectation is that the government’s tax take is on the up. Costs to the UK economy of Cov19 has left the UK with a deficit well above pre-lockdown expectations. Estimates for the 2020-21 budget deficit vary widely. The office for budget responsibility forecasts around 300 billion pounds. The highest since 1945.
Having a manifesto pledge of no rises in income tax, VAT and national insurance, it is near inevitable that outcome of the review be increases in capital gains tax. The nil rate band for inheritance tax has not increased since 2009-10 and has therefore been saddled by hefty fiscal drag. The rate of tax of 40% already leaves many estates in London and the South with selling the family home.
Two Budgets have been scheduled this year. Announcements about capital gains tax are likely in the Autumn Budget. Possible reforms are surmised below.
An abolition of principal private residence relief on former homes
The largest group concerned will be landlords letting their prior residence. Reform would reduce the population of ‘accidental landlords.’ This type of landlord opts to let rather than sell property when moving home. The practice was commonplace during the period of rapid rises in property prices, especially in the UK’s hotspots, and prior to tax reforms targeted at landlords. In recent years, the trend is to increase regulation on landlords about pressure on government to make housing more affordable. With the average age of first-time buyers rising and the pound at historic lows there is sufficient pent up demand to support changes to PPR.
The final deemed period of occupation has been reduced twice recently: from 36 months to 18 months on 6 April 2014 and again to 9 months on 6 April 2019. The benefit of a further reduction would unlikely be outweighed by the hassle it would put to house movers. The relief is intended to accommodate the situation where a homeowner temporarily holds two properties to facilitate moving or due to a setback in the disposal of the former home.
A further deemed period covers temporary periods of absence, for instance where the homeowner is seconded elsewhere or otherwise unable to live in their home, such as due to jailtime. It excludes any period in which the individual had another property that qualified as a PPR. It is also a requirement that there is an actual period of occupation both before and after the period of absence. While the deemed period of absence is capped at four years for individuals relocating within the UK, there is no time limit for overseas workers. With an increasingly globalised workforce, this regulation could be regarded as out of date. Following the Budget, the concession could be significantly reformed or simply scrapped.
An increase in basic and mainstream rates (from 10 percent and 20 percent, respectively.) As recently as 2007/08 capital gains tax was charged at the highest rate of income tax, which at the time was 40%;
Rumours about a scrapping of the relief were circulation following a consultation prior to the 2018 Budget. Instead the relief was reformed with the minimum holding period extended to two years. Recent government focus on entrepreneur’s relief suggest that it is on the radar. Removal of entrepreneur’s relief would have significant ramifications for contractors who have accumulated funds in their business as a form of long term tax planning.
Non-residents are currently exposed to capital gains tax about appreciation in their residential property assets since 6 April 2019. This contrast with UK residents who are subject to gains accruing over the entire period of ownership. Rebasing allows non-residents to gain considerable reduction in exposure to CGT as compared to a UK resident.
Consequently, an emigrant can obtain a capital gains tax free uplift in value of their asset by rebasing. This would be applicable, for instance, on buy to let property. Unlike the old rules, rebasing is not disapplied for temporary non-residents. Therefore, an individual could move for a contract of employment lasting a year, dispose of their property while non-resident and return to the UK avoiding considerable taxation.
By contrast, a non-resident who purchases a property prior to 5 April 2019 and moves to the UK after 6 April 2019 cannot re-base. An immigrant could face a substantial tax ‘penalty’ on moving to the UK. Property owners, as such likely to be wealthier on average, are discouraged from residing in the UK because of existing legislation.
Regulation should adjust to an increasing mobile and globalised population, to tax assets in the country in which these assets are located rather than the country in which the person finds themselves resident on the date of disposal.
With rhetoric across the political spectrum critical about perceived non-domiciled privileges and the referendum as an indicator about the public mood on Brexit, there is the political will for reform on non-resident landlords. A statutory residence test came into effect on 6 April 2013 and rules concerning the taxation of overseas assets held by non-doms are becoming stricter.
The use of market valuation is impractical and open to abuse as compared to transaction values recorded with the land registry. The system relies on valuers commissioned by the property owner. Property owners who leave the UK may not have been aware of their future residency at 6 April 2019. Justifiably, this group would not have had a revaluation at 6th April 2019 and will rely retrospective valuations which have even less inherent reliability.
Pensions have already been speculated upon a likely area that The Chancellor will turn to plug the financial hole left by lockdown. The exclusion of certain assets from pension funds would limit the tax shelter. Commercial property is an obvious example. A requirement for pension funds to rebase property would be easier to enforce than a rebasing directed at individuals. With high street values depressed, the longer-term potential for government revenue would be enhanced. Classic cars, racing horses, gold bullion and various other exempt assets classes could be brought into charge, although the effect on budget deficit would be comparatively minor.
Typically in a Budget, certain taxes take effect immediately, most tend to come into force from the tax year following that of the Budget, some reforms are phased in or scheduled further into the future. Changes that take effect on Budget day tend to relate to indirect taxes, VAT, stamp duty and other levies.
Likely there will be time to make changes before 6 April 2021. A benefit could be achieved by bringing forward a charge to capital gains tax, so that gains are released in 2020-21. Post-tax proceeds from asset transfers will be affected both by fiscal policy and the effect that policy holds over values. Where house prices are concerned a short-term advantage could be gained by incentives created in the market by the stamp duty holiday.