Capital gains tax in the United Kingdom

Capital gains tax in the United Kingdom is a tax levied on capital gains, the profit realised on the sale of a non-inventory asset by an individual or trust in the United Kingdom. The most common capital gains are realised from the sale of shares, bonds, precious metals, real estate, and property, so the tax principally targets business owners, investors and employee share scheme participants.

Throughout this article, the term "pound" and the £ symbol refer to the Pound sterling.

In the UK, gains made by companies fall under the scope of corporation tax rather than capital gains tax. Total capital gains tax receipts were £8.3 billion from 265,000 individuals and £0.6 billion from trusts on total gains of £58.9 billion in 2017–18.[1]

The current operation of the capital gains tax system is a recognised issue. The Conservative government consulted on the issue in 2020.[1]

Beginnings

Jim Callaghan, the Chancellor of the Exchequer who introduced capital gains tax in 1965.

The capital gains tax system was introduced by Labour Chancellor James Callaghan in 1965.[2] Prior to this, capital gains were not taxed. Channon observed that one of the primary drivers to the introduction of CGT in the UK was the rapid growth in property values post World War II. This led to property developers deliberately leaving office blocks empty so that a rental income could not be established and greater capital gains made.[3]

Exemptions and allowances

The main reliefs from capital gains tax in the UK is private residence relief, which brings an individual's principal residence out of scope of the tax, and personal possessions with a value of less than £6,000.[1] There are also exemptions for holdings in ISAs or gilts. Certain other gains are allowed to be rolled over upon re-investment. Investments in some start up enterprises are also exempt from CGT. This means that most asset sales do not incur any capital gains tax. Allowable costs include the costs of sale of the asset and capital losses realised in the same year may be used to reduce capital gains made on other assets.

In 1977, there was a general exemption for individuals from paying any tax if gains were less than £1,000 in any given tax year, which runs from 6 April to 5 April in the United Kingdom. Now known as the Annual Exempt Allowance, this has generally risen steadily ever since and the rate for trusts has always been half of the threshold for individuals, so it was £500 in 1977. The rate for individuals in 2020–21 is £12,300 for individuals and £6,150 for trusts.[4]

Labour Chancellor Gordon Brown replaced indexation allowance with taper relief in 1998 to reward risk taking and promote enterprise.[1] Taper relief was abolished in 2008. Indexation allowance generally reduced the tax payable on a gain by increasing the cost of the asset in line with inflation. Taper relief reduced the tax payable on assets that were owned for longer periods of time and its removal was caused, at least in part, because the UK government felt that private equity firms were making excessive profits by benefiting from overly generous taper relief on business assets. The changes were criticised by a number of groups including the Federation of Small Businesses, who claimed that the new rules would increase the CGT liability of small businesses and discourage entrepreneurship in the UK.[5] At the time of the proposals there was concern that the changes would lead to a bulk selling of assets just before the start of the 2008–09 tax year to benefit from existing taper relief.

Rates

From 1965 to 1988, most gains suffered a 30% rate of capital gains tax. In 1988, Conservative Chancellor Nigel Lawson aligned rates with those for income tax this regime continued until 2008.[1]

In 2008, Gordon Brown introduced a flat rate of 18% for all taxpayers alongside Entrepreneurs' Relief, which applied to some gains made on business assets and company shares. The rate on these gains was at a lower 10% rate.

In the March 2010 budget, Conservative Chancellor George Osborne introduced a rate of 28% for individuals paying the higher or additional rate of income tax, but it remained 10% under Entrepreneurs' Relief for those higher rate taxpayers. The limit for the relief was raised to £2 million.[6] It was raised to £5 million three months later by the new Conservative/Liberal Democrat coalition government, who then raised it to £10m in the March 2011 budget[7]

On 6 April 2016, new lower rates of 10% (for basic taxpayers) and 20% (for higher taxpayers) were introduced for non-property and non-carried interest disposals.[8]

Entrepreneurs' Relief was renamed Business Asset Disposal Relief in 2020 Budget and the lifetime allowance under the relief was reduced from £10,000,000 to £1,000,000.[9]

Demographics

Between 2011 and 2019, very large gains have become more prevalent and make up a larger proportion of total net gains, while smaller gains are also on the rise albeit at a slower rate. A very small proportion of taxpayers pay capital gains tax in consecutive years and most gains are made on company shares. The majority of taxpayers are over the age of 55.[1]

Example computation

This is an example computation involving an individual that pays tax at the higher rate and has made a sale on a non-residential asset.

Example J Smith

	£
Value of asset	100,000
Cost of asset	(30,000)
Gain	70,000
Annual Exempt Amount	(12,300)
Taxable Gain	57,700
Tax @ 20%	11,500

Reform

Criticism

In the opinion of the Resolution Foundation entrepreneurs' relief is expensive, regressive and ineffective. Scrapping the tax relief they argue could generate £2.7 billion that could be spent on the public sector. However, that figure supposes that the relief scheme has zero effect in encouraging entrepreneurship and that individuals who had worked hard to create wealth would not look to reduce their tax bills. The Resolution Foundation maintains this tax break is enough to give £100 per year to every household in the country if it is abolished. Roughly 52,000 individuals benefited from the tax break in 2015-16, but the chief financial gain was for a few very people, with about 6,000 claiming over £1m each. The overall cost of the tax relief over a decade was roughly £22bn though its effectiveness has not been seriously evaluated. Most entrepreneurs who claim the tax break say they did not know about it when they started their company, the foundation maintains.[10]

2020 Government consultation

In November 2020, a report into capital gains tax reform was published.[1]

Rates and income tax

The report made the recommendation to consider aligning capital gains tax rates with income tax rates or addressing boundary issues between the two taxes.

Under the first option, there would need to be appropriate relief for indexation, adequate interaction with company tax positions and more flexibility for use of losses.

If there remained a disparity between the capital gains and income tax rates, the number of CGT rates should be reduced and there should be further consideration of the impact of an individual's other income. It should also be considered whether capital rewards for personal labour should be taxed at income tax rates, even if capital tax rates were to remain distinct.

Annual Exempt Allowance

In any case, it was concluded that consideration should be put towards reducing the Annual Exempt Amount from its current level of £12,300.

Interaction with inheritance tax

Under circumstances where an asset owner dies, they may benefit from a relief and exemption from inheritance tax, as well as benefiting from an uplift on the base cost of the capital gain. It was suggested that the base cost could remain at the cost of the person who died for capital gains purposes. This may require the rebasing of all assets perhaps to the year 2000.

Business reliefs

It was concluded that the government should consider replacing Business Asset Disposal Relief, formerly Entrepreneurs' Relief, with a relief more focused on retirement by increasing the minimum shareholding, increasing the holding period of assets and introducing a minimum age limit at a high level.

See also

• Taxation in the United Kingdom
• Capital gains tax

References

1. Capital Gains Tax review – first report: Simplifying by design
2. "Telegraph: Capital Gains Tax: a brief history". The Daily Telegraph. Retrieved 8 January 2014.
3. Channon, Derek F (1978). The Service Industries. London: The MacMillan Press Ltd. ISBN 0841950326.
4. Rates of Capital Gains Tax (PDF)
5. Jean Eaglesham and John Willman (23 January 2008). "Final showdown on CGT reforms". Financial Times. Retrieved 23 January 2008.
6. Jordan, Dearbail (24 March 2010). "Budget 2010: a comprehensive at-a-glance guide". The Times. Retrieved 25 August 2011.
7. http://www.hmrc.gov.uk/budget2011/tiin6173.pdf
8. Ross Martin Tax Consultancy Limited (16 April 2018). "CGT Capital Gains Tax rates and bands". Retrieved 2 August 2018.
9. https://www.ftadviser.com/your-industry/2020/03/11/budget-2020-chancellor-slashes-entrepreneurs-relief/
10. Move tax relief for entrepreneurs to NHS, thinktank says The Guardian

External links

• "Acts of the UK Parliament and Explanatory Notes". Office of Public Sector Information.