CAPITAL GAINS TAX may see a huge hike in a bid to raise more money following the expense of the coronavirus pandemic. But will the tax increase this year?
Capital Gains Tax is currently being considered for a massive overhaul by Chancellor of the Exchequer Rishi Sunak. The Chancellor is considering if the current system is fit for purpose. Officials are considering whether to reform this tax so it is paid at the same rate as income tax. But could Capital Gains Tax really increase this year?
What is Capital Gains Tax?
Capital Gains Tax is a tax on the profit when you sell or dispose of an asset which has increased in value.
The amount made on that sale is taxed, not the amount of money you receive.
For instance, if you purchase an antique worth £5,000 but it is later sold for £25,000, you made a gain of £20,000.
What do you have to pay Capital Gains Tax on?
You pay Capital Gains Tax when you sell the following, known as chargeable assets:
- Most personal items worth £6,000 or more, aside from your car
- Property which is not your main home
- Your main home if you have let it out, used it for business or it is very large
- Shares which are not in an ISA or PEP
- Business assets
You do not pay Capital Gains Tax on the following items:
- ISAs or PEPs
- UK Government gilts and Premium Bonds
- Betting, lottery or pools winnings.
You also do not usually pay tax on gifts made to a spouse, civil partner or charity or when you inherit an asset.
You will only have to pay Capital Gains Tax if you later dispose of an asset which you have inherited.
Could Capital Gains Tax increase in 2020?
One of the measures under consideration is reforming capital gains tax so that it is paid at the same rate as income tax.
As a result, the tax on profits from selling assets would rise from 10 to 20 percent for basic-rate taxpayers.
The tax rate would also increase from 18 to 20 percent for profits on the sale of second homes.
For higher-rate and additional-rate taxpayers, the levy could rise from 20 percent on asset sales and 28 percent on property sales to 40 percent respectively.
Each increase in percentage point of Capital Gains Tax is estimated to make around $60 million.
Mr Sunak could commission a review into Capital Gains Tax.
The Chancellor may choose to tax capital gains at the same rate as that applied to dividend income.
Currently, any annual dividend income from shareholdings where £2,000 is taxed at 7.5 percent, 32.5 percent or 38.1 percent, dependent on whether an investor is a basic, higher or additional rate taxpayer.
These rates sit between current capital gains tax rates and income tax rates.
Earlier this year a Treasury source said the review was not likely to have a huge impact.
The source told The Times: “It is standard practice to review taxes and CGT is one of the few taxes that has not yet been reviewed.”
The source added: “There is absolutely no expectation anything substantive will come out of this in terms of policy change. CGT reform is not in our sights.”