Planning distributions for possible capital gains tax rate changes

02 November 2020

Earlier this year the Chancellor requested that the Office of Tax Simplification (OTS) conduct a review of capital gains tax (CGT). The request had an extremely wide remit and this, together with a general view that tax rate increases seem likely across the board, means trustees with UK resident beneficiaries should consider tax planning options that could be undertaken now to mitigate future exposure.   

Currently, CGT rates are 10 per cent for basic rate taxpayers and 20 per cent for higher or additional rate taxpayers. The rates rise to 18 and 28 per cent respectively for disposals of UK residential property or carried interest. 

Scope for change

The OTS is reviewing how capital gains are taxed for both individuals and businesses. It is particularly focusing on allowances, exemptions, reliefs and the treatment of losses within the CGT regime, and the comparison of how capital gains are taxed when compared to income. There are a number of possible outcomes following the OTS review. A few speculative possibilities are: 

  • having different rates for short-term and long-term gains;
  • an increase in CGT rates to align more closely to income tax rates (maximum of 45 per cent currently); and
  • reduce or abolish the CGT annual exemption. 

Furthermore, with the current situation we find ourselves in due to coronavirus, the Government may well decide to increase rates before the OTS review is published. The Spring Budget is expected in March 2021, and any changes announced then could be implemented from the date of the Budget or, more likely, with effect from 6 April 2021 but with some provisions to limit planning undertaken in the intervening period. 

Actions

Trustees, particularly trustees of non-UK resident trusts, should review their trusts now and, if relevant, should discuss UK resident beneficiaries’ needs. Questions to ask, include: What are their future requirements? Are they likely to need distributions? Are there significant unrealised gains on trust assets? 

Capital gains realised by non-UK resident trusts and matched to distributions made now to UK resident beneficiaries will be taxed at their current rates of CGT and the annual exemption can be utilised, if available. However, trustees will need to review the current trust tax pools which can be time consuming. 

Supplementary charge on undistributed gains

The impact of any increase in tax rate would be potentially increased due to the supplementary tax charge – an additional charge levied where gains of an  offshore trust are not distributed within two years of the disposal. 

The table below shows the effective tax rates for a beneficiary receiving a distribution in the 2020/21 tax year – the differing rates in each column show the impact of an increase in the CGT rate, taking into account when the gains arose that the distribution is matched to. 

The final two columns show an increased CGT rate – either to 28 per cent (the current rate that applies to residential property) or 45 per cent (the current highest income tax rate). 

The year that the matched gains arose in the trust Effective tax rate including supplementary change
20% CGT rate
(current rate)
28% CGT rate 45% CGT rate
2021/22 and thereafter 20% 28% 45%
2020/21 20% 28% 45%
2019/20 20% 28% 45%
2018/19 24% 33.6% 54%
2017/18 26% 36.4% 58.5%
2016/17 28% 39.2% 63%
2015/16 30% 42% 67.5%
2014/15 & earlier 32% 44.8% 72%

As you can see from the table, this could mean tax rates of up to 72 per cent if the gains arose in 2014/15 or earlier. 

By comparison, making a distribution in the current tax year that is matched with 2014/15 gains would be taxed at 30 per cent. 

Potential tax rate increases should prompt trustees to take stock of their position -  trustees would be well advised to consider the impact of increased tax rates and take action now if needed.  

For more information, please contact Alex Foster.