Record breaking CGT revenues highlight the need to plan up front

In the latest tax receipt statistics published by HMRC, increases to tax revenues can be seen across the board but one tax stands alone for its astronomic growth levels: capital gains tax (CGT).

In the year to 31 March 2022, CGT revenues hit record levels of £14.9bn, over £11bn higher than in the year to 31 March 2014; a huge (380 per cent) rise in percentage terms that is unmatched by any other UK tax in the same period.

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 fears that CGT rates will increase.

Landlords and second-home owners

Landlords and second-home owners have helped contribute to an increase of around £1bn 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 coronavirus pandemic.

As taxpayers are now required to report and pay any CGT due on the sale of residential property within 60 days of a disposal, second-home owners and landlords are now contributing CGT revenues throughout the year, whereas in the past, very few CGT revenues were received between April and December each year. CGT revenues of £1.448bn were received in the April to December period in 2021. For the same periods in 2020 (when the new requirement for CGT to be paid within 30 days (now 60 days) of a sale came in on residential property sold by UK residents and was extended to cover both commercial and residential property sold by non-residents) and 2019, the amounts received were £470m and £45m respectively.

The holidays for stamp duty land tax (SDLT) and similar property transaction taxes in Scotland and Wales during 2020 and 2021 also artificially inflated the property market, both in terms of price and volume, so what many thought was a tax giveaway by the Chancellor and his counterparts has actually contributed to record CGT receipts in what amounts to a windfall for the Exchequer.

Tax increases on business owners

Rishi Sunak’s first major act as Chancellor in rebranding entrepreneurs’ relief as business asset disposal relief (now widely dubbed as BAD relief) and reducing the total gains that qualify for relief is also a major factor behind the record CGT revenues.

At the time, entrepreneurs’ relief had been labelled by the Resolution Foundation as ‘the UK’s worst tax break’ and was estimated to cost the Government around £2.7bn a year. It provided business owners a reduced tax rate of 10 per cent on cumulative capital gains of up to £10m during their lifetime and was typically available on the sale of a business.

By reducing the total amount of gains that can qualify for the preferential tax rate of 10 per cent from £10m to £1m, this could have swelled the Treasury’s coffers by approximately £2.4bn and potentially more.

Fears over CGT rate rises

Many business owners, fearful that the rate of CGT could increase substantially, may have also accelerated plans to sell their businesses or have deliberately triggered a CGT liability earlier than planned in order to secure a lower rate of CGT on any chargeable gains arising.

Ahead of each recent 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 leave on repeat as it has led to a frenzy of business disposals before every recent government fiscal announcement as owners rush to get deals completed.

Up front planning

Although the Chancellor may be pleased with the growth in CGT receipts, it is likely that the stimulus to property prices and the early disposal of business assets are one-off effects that may ultimately reverse, leaving him with limited options to maintain revenues. Business owners, landlords and others who may be looking to sell chargeable assets and are still concerned that a CGT rate rise remains on the Chancellor’s agenda, may therefore wish to consider reviewing their future business and succession plans at an early stage to avoid rushed decisions nearer the next Budget this autumn.

For more information, please get in touch with Chris Etherington or your usual RSM contact.