In the latest tax receipt statistics published by HMRC, there are increases to tax revenues across the board but one tax stands alone for its astronomic growth levels: Capital Gains Tax (CGT).
In the year to 5 April 2022, CGT revenues have hit record levels of £14.9 billion. That is over £11 billion higher than the CGT receipts received in the year to 5 April 2014, a huge rise that is unmatched by any other UK tax in the same period in percentage terms.
So what is driving these record-breaking CGT revenues? The answer lies in a combination of factors, including spiralling increases in property prices, the hike in tax rates on business owners selling out and from fears that CGT rates will increase.
Landlords and second-home owners
We now have a clearer picture of how much landlords and second-home owners have been contributing to the CGT revenue figures. Taxpayers are now required to report and pay any CGT due on the sale of a residential property within 60 days so second-home owners and landlords are contributing CGT revenues throughout the year. In the past, very few CGT revenues were received between April and December each year.
Landlords and second-home owners have helped contribute to an increase of around £1 billion CGT revenues from the prior year in the period from April to December 2021. This has been driven by the large increases in property prices in the last two years and the pent-up demand for property transactions built up as a result of the pandemic.
The Stamp Duty Land Tax holiday also artificially inflated the market, both in terms of price and volume, so what many thought was a tax giveaway by the Chancellor has helped contribute to record CGT receipts.
CGT revenues of £1.448 billion were received in the period from April to December 2021. For the same periods in 2020 (when the new payment rules for CGT came in on residential property) and 2019, the amounts received were £470 million and £45 million respectively.
Tax increases on business owners
Rishi Sunak’s first major act as Chancellor is a major factor behind the record CGT revenues when he scrapped Entrepreneurs’ Relief and replaced it with Business Asset Disposal Relief (now widely dubbed as BAD Relief).
At the time, Entrepreneurs’ Relief had been badged by the Resolution Foundation as the ‘UK’s worst tax break’ and was estimated to cost the government around £2.7 billion a year. It provided business owners a reduced tax rate of 10 per cent on capital gains of up to £10 million during their lifetime and was typically available on the sale of the business.
By reducing the amount of gains that can qualify for the preferential tax rate of 10 per cent from £10 million to £1 million, this could have swelled the Treasury’s coffers by approximately £2.4 billion and potentially more.
Fears over CGT rate rises
The reason why CGT revenues from business owners could be even higher is that many have been fearful that the rate of CGT could increase substantially and have accelerated plans to sell their businesses or trigger a CGT liability early.
Latest statistics show that over 40 per cent of all CGT is paid by those with gains of £5 million or more, representing 1 per cent of CGT payers. For some, CGT is broadly a voluntary tax as it requires someone to choose to sell something. Motivating this 1 per cent group of taxpayers to make disposals subject to CGT can therefore have a big impact.
Ahead of each Budget announcement, there has been speculation that CGT rates may be increased, potentially to a rate as high as 45 per cent in line with income tax rates. This is a tune that the Chancellor has been quite happy to have on repeat as it has led to a frenzy of business disposals before every government fiscal announcement as owners rush to get deals completed. Some continue to worry that a CGT rate rise remains on the Treasury’s agenda but with results as good as this then the best policy may be if it isn’t broken, don’t fix it.