Investors, entrepreneurs and buy-to-let landlords face substantially higher rates of capital gains tax if the government accepts new recommendations for reform of the system.
The reforms, proposed by The Institute for Public Policy Research, would result in a hike in the rates of capital gains tax, all to make the UK’s tax system fairer while increasing revenue to the Treasury.
The think tank made its proposals in a report called Just Tax.
It estimated the government could raise an additional £90bn in capital gains tax over the next five years by making one simple change; taxing capital gains at the same rate as income.
Under the current tax system, capital gains are taxed based on different thresholds to income tax. Higher earners typically pay lower rates of capital gains tax than they do for income tax.
Another proposed change from The IPPR, which could raise £15bn extra in five years, would be to remove the capital gains tax exemption on death. As things stand, a deceased’s estate is not subject to capital gains tax, instead of suffering only inheritance tax.
The driving force behind the proposed reforms is the recognition that different sources of money currently result in very different tax treatments. This anomaly in the tax system means higher earners can pay lower tax, on average, than lower earners who solely derive their income from employment.
According to the IPPR, this system is “fundamentally unfair”, distorting economic behaviour and opening the doors to tax avoidance opportunities.
Capital gains tax is charged on the profit made when most personal possessions worth more than £6,000 are sold. Excluded from this tax are vehicles, investments held within the tax-wrapper of an Individual Savings Account (ISA), and principle private residences (homes).
The tax is charged at 10% or 20%, depending on the income tax band of the taxpayer. Capital gains tax on property sales is currently charged at 18% for basic rate taxpayers and 28% for higher and additional rate taxpayers.
According to the Just Tax report:
“Taken together, we believe these proposals amount to a transformation of the taxation of income which would move us towards a more economically just system and warrant serious consideration for any government interested in raising revenue in a progressive manner.”
The proposals to reform capital gains tax have come along at an interesting time, with a great deal of speculation about a snap general election.
Despite his best efforts, Prime Minister Boris Johnson has failed to force a general election ahead of the prorogation of parliament until mid-October.
Should a general election occur around the time of the UK’s scheduled departure from the European Union at the end of October, taxation is likely to form a key battleground for the parties, as well as Brexit.
But these proposals from the IPPR serve as a stark reminder that tax policy can and does change, sometimes with little notice.
Investors would be well advised to consider the consequences of any capital gains tax hike and plan by utilising available allowances today to move taxable investments into tax-free wrappers.