66 1GM Saturday November 14 2020 | the times
Money
The Low Incomes Tax Reform
Group is concerned that it could drag
thousands of people into the self-
assessment tax system for the first time.
Robert Colvile, the director of the
Centre for Policy Studies, a centre-
right think tank, said: “Raising CGT
will discourage people from starting
businesses, make it harder for start-ups
to scale up, impede entrepreneurship
and damage economic dynamism and
national prosperity just at the time we
need it most. Instead, the government
should look at reforming the UK’s tax
system to attract investment.”
Other critics of the plans say that
CGT is already extremely complex and
they would prefer a single rate, like the
one was used from 2008 to 2010, when
it was 18 per cent. A further alternative
may be to bring back indexation, which,
though complicated, allowed investors
to offset gains alongside inflation.
What you can do
The best way to escape CGT is to pay as
much as you can into a pension or Isa.
You can put £20,000 in an Isa a year and
withdrawals are tax-free for life.
Pensions offer tax relief on contribu-
tions, and 25 per cent tax-free with-
drawals from age 55. They are free from
inheritance tax and can be passed onTax hike for rich could
catch out smaller savers
The chancellor could
raise £14 billion by
changing capital gains
tax — but will it work,
asks David Byers
£70 billion of extra revenue over five
years to help to pay for the costs of the
pandemic. Critics queried the figures
and said that the changes would hinder
wealth creation in the UK.
What is capital gains tax?
CGT is a tax on profits on investments,
property, art or shares held outside anIsa or pension. This does not inlude
government gilts, Premium Bonds and
any rise in the value of your main home.
Every year you can cash in or give
away £12,300 worth of gains tax-free.
After this there are two sets of rates: for
residential property and other assets.
Basic rate taxpayers are charged
18 per cent on gains from residential
property and 10 per cent on profits from
other assets. Higher rate taxpayers
pay 28 per cent on residential property
gains and 20 per cent on other assets.
According to HMRC, 276,000 tax-
payers paid £9.5 billion in CGT from
gains of £62.8 billion in 2018-19.
How could it be reformed?
The OTS made 11 recommendations, of
which the most important was aligning
CGT rates with income tax rates. Under
the existing system it is more lucrative
to have something charged as a gain
rather than income.
Not only does this effectively give
two tax-free allowances (one for
income tax and one for CGT), it also
means that basic rate income taxpayers
can be taxed at 10 per cent instead of
20 per cent on asset sales, or 18 per cent
instead of 20 per cent on second home
and investment property sales.
Higher rate taxpayers pay CGT at
20 per cent on asset sales and 28 per
cent on property sales, instead of their
40 per cent rate of income tax (45 per
cent for additional rate taxpayers).
The OTS suggested having the same
rate for income tax and capital gains,
and also wants the CGT allowance to be
reduced to catch out more taxpayers.
It said that the number of people
paying the tax would double to 552,000
if the threshold went down to £5,000,
and triple if was reduced to £1,000. It
suggested a range of between £2,000
and £4,000 and said this would raise an
additional £14 billion a year.
In another important change, any
assets passed to a beneficiary could
incur more tax by the scrapping of an
“uplift rule”, which means that the
value of an inherited asset is calculated
when someone dies, so the inheritor
does not have to pay gains for the time
the other person owned it.
There were no proposals to impose
CGT on sales of main homes, which
would raise £26 billion a year.
What could the chancellor do?
Proponents of the plan say that it would
make the tax system fairer. A study by
the London School of Economics and
Warwick University, published in June,
found that six out of ten of the 0.01 per
cent highest earners in Britain get at
least 90 per cent of their money
through capital gains. This means that
someone paid £10 million a year would
have an effective tax rate of 21 per cent
— less than someone earning the
median salary of £30,000. More than
half of all CGT paid in 2017-18 (54 per
cent) was paid by 5,000 people.
“Capital gains tax is mostly paid by
a pretty small group of wealthy people
who use it to minimise their bills,” said
Robert Palmer, an executive director of
Tax Justice UK, a campaign group.
Raising CGT levels would, however,
hit business owners selling up, ordinary
investors cashing in shares, 2.7 million
landlords and 1.4 million second-home
owners. Chris Etherington from the tax
adviser RSM said that the proposals
were “sending taxpayers into a tailspin”.
Many would “now be looking at
whether they should sell off assets
ahead of the spring budget”.L
andlords and owners of sec-
ond homes and businesses
could have to pay tens of thou-
sands of pounds in extra taxes
if Rishi Sunak adopts propo-
sals to reform capital gains tax (CGT).
The Treasury-backed Office of Tax
Simplification (OTS) said that sugges-
tions it made this week could bring inK
ishore Naik, 66, an
accountant, has had
a portfolio of shares since
the 1980s and one day hopes to
cash them in to give to family.
“They grow between 12 per cent
and 15 per cent per year,” he said.
If the capital gains tax (CGT)
rates changed and his family
needed money he would rather
take out a loan at a low interest
rate than cash in his investments.
“Why crystallise gains today when
you can borrow at such low
rates?” said Kishore, above.
He believes that the proposed
changes would stop people
investing in the stock market.
“Why should I invest in companies
when 40 per cent of any gain
I make will be taken away in tax?”The family man w
a portfolio to sha
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