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A raft of recent proposals to raise revenue for the government would represent an attack on wealth says Michael Lewis, specialist UK and US tax advisor and Director at Frank Hirth. Lewis believes the government could announce Capital Gains Tax changes effective from as early as April 06.
When the chancellor addressed the nation with his coronavirus recovery plan, one could be forgiven for wondering how on earth we might pay for it all.
The UK is forecast to borrow a total of £394bn this year, equivalent to 19 per cent of GDP.
Or, for perspective, just short of the economy of Israel.
It’s a stunning amount of debt that needs to be serviced. The recently announced public sector pay freeze together with previously announced changes to pensions will no doubt help to plug the hole.
There was surprise from some circles, though, that the chancellor didn’t enact the Office for Tax Simplification (OTS) proposals on Capital Gains Tax (CGT) that he commissioned barely a few months ago.
That the pandemic would be paid for through creative taxation was of course an inevitability. That capital gains tax would be in ‘the firing line’– given that it is levied at rates lower than those applied to income and paid by a small minority – likewise.
Which for investors in the UK, could be a costly exercise.
At its very core CGT is a tax on the profits realised when certain assets are sold. Whether you buy shares in a UK company or an acre of land here, when you sell it, you are subject to tax on the gain.
Presently, any gains on investments not held in vehicles such as an ISA or pension are liable, with each of us allowed to make £12,300 of gains each year before the tax applies.
Under the headline proposal from the OTS, the CGT rate will be equalised to the rate of Income Tax, representing a significant hike for the UK’s wealthiest.
These proposals, combined with the Wealth Tax Commission’s recent plans, initiate an attack on wealth – something many on the political left have long sought.
This is problematic for a number of reasons – most notably that as we approach Brexit and its promised fields of gold, the government should be aiming to make the UK as attractive a place to invest as possible.
Already there has been a sell-off of director’s shares, while entrepreneurs have lambasted the proposals as punitive and ‘anti-competitive’.
Whether the changes will go ahead or not is moot – the government by commissioning the report has effectively indicated that they are ‘being considered’ so investors must prepare regardless.
On top of utilising the CGT-free zones such as ISAs as much as possible, rebasing one’s assets is an option: for liquid assets such as shares, selling them today and reinvesting in something similar for 30 days will reduce exposure to future CGT rises.
This is all very well for liquid assets, especially those traded on an exchange. But when it comes to illiquid assets such as property, things get a bit more difficult.
In some cases it may for instance be possible to sell assets to a trust that they are the beneficiary of.
But this naturally varies on a case-by-case basis and this type of planning is much more difficult.
Capital gains are made over many years but are cashed in just once. Years of value someone has built up in the UK could soon be scalped to pay for the pandemic. But ‘could’ is the key word here.
Not in my career has such a fundamental proposal grown from a germ of an idea into a fully-fledged threat in such a short period. It is, one might argue, suspiciously fast.
There is likely a political element to the timings of this report.
Dangling what is essentially a wealth tax before announcing public sector pay cuts offered a feeling that the pandemic pain is distributed regardless of wealth.
But another reason might be the threat of-anti-forestalling rules.
Though there has been no announcement yet, under these rules, any financial planning undertaken in anticipation of a CGT change could potentially be subject to regulations that negate the benefit.
My feeling is that the government will announce CGT changes effective from 6 April.
We might therefore receive an update to that effect in the next few months with potential provisions designed to ensure that any planning we undertake from the date of announcement are not effective.
The suspicion that any announcement will be accompanied by ‘anti- forestalling measures’ is encouraging action now.
The ambiguity from the chancellor is I believe intentional.
By not making his intentions clear, while allowing speculation to grow individuals have already started to sell assets with a view to reducing their future CGT liability.
In creating this environment, the exchequer has forced people to cash in assets, pay CGT, and create a windfall for the country – all without changing a thing.