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Capital Gains Tax

Nigel Ginniff explains the changes to Capital Gains Tax following the November Budget statement,

In November 2020 the Office of Tax Simplification issued a report making proposals to simplify Capital Gains Tax (“CGT”). On pages 18 and 19 of the report the following changes were suggested:

· Align the rates of CGT with the rates of Income Tax.

· Consider a relief for inflationary gains

· Reduce the Annual Exempt amount

In the latest Budget statement of November 2022 the Chancellor of the Exchequer has adopted one of these changes. Clause 8 of the Finance Bill 2022 states that from 6th April 2023 the Annual Exempt Amount (“AEA”) for individuals will be reduced from the current £12,300 to £6,000 and for trustees and personal representatives from £6,150 to £3,000. From 6th April 2024 the AEA will be reduced again to £3,000 for individuals and £1,500 for trustees and personal representatives. The AEA is set against the gain made (after expenses of acquisition and disposal and any reliefs) on the disposal of a chargeable asset.

“The annual exempt amount for capital gains tax will be cut from £12,300 to £6,000 next year and then £3,000 from April 2024. Those changes still leave us with more generous allowances than countries such as Germany, Ireland, France, and Canada.”. The allowance may be more generous but the overall tax burden on a capital gain in the UK depends upon the asset disposed and the tax rate applicable.

In a time of high inflation and rising property prices, much of the gains made will be by reason of time and inflation. Between 1982 and 2008 individuals were permitted an “indexation allowance” against any gain they made to reflect the fact that only the “true” gain should be taxed. In the absence of such an allowance, the government is taxing a gain that arises simply by reason of inflation. The government has chosen not to re-introduce a relief for inflationary gains.

On a more positive note in its second report of May 2021, the Office of Tax Simplification recommended that the period of time during which a divorcing or separating couple can transfer assets between themselves on the basis of the transaction being carried out at neither a gain nor a loss should be extended to the later of:

a. The end of the tax year at least two years after the separation event

b. Any reasonable time set for the transfer of assets in accordance with a financial agreement approved by a court or equivalent process in Scotland.

This recommendation has been adopted by the government and will be introduced with effect from 6th April 2023.

The reports of the Office of Tax Simplification have more radical recommendations, such as withdrawing the entitlement of a beneficiary of an estate to inherit an asset at its market value as at the date of death for the purposes of CGT. It proposes that the beneficiary should inherit the asset at the value, for CGT purposes, that the deceased acquired the asset. The reports recommend reliefs or rebasing in such circumstances but, as above, the government can “pick and choose” what it wants to adopt.

It is a time to review one’s CGT planning.

Nigel Ginniff

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