Chancellor Rishi Sunak has requested a review of Capital Gains Tax (CGT) rules from the Office for Tax Simplification (OTS), prompting concerns from investors that there could be a “tax raid” to help offset the public expenditure accumulated during the coronavirus pandemic.
The OTS has published an online survey and a "call for evidence" to seek views regarding CGT. According to the UK Government's website, it wants to "hear directly from individuals and businesses" as well as "professional advisers and representative bodies" about which aspects of capital gains tax are "particularly complex and hard to get right, and to hear any suggestions for improvements".
The consultation will close at 11.45pm on 20 October this year.
Tom Selby, senior analyst at AJ Bell, said Sunak's request for a review "feels like the starting pistol for a tax grab" ahead of the Autumn Budget later this year.
He said: "A quick look at the numbers gives us some idea of why CGT might be in the Treasury's crosshairs. While chargeable gains subject to CGT after losses but before the annual exempt amount were £57.9bn in 2017/18, total CGT liabilities were £8.8bn - implying an average tax rate of just 15%.
"Given those who pay CGT are twice as likely to pay higher-rate (40%) income tax as taxpayers generally, the Treasury may have its sights set on aligning CGT rates and income tax rates."
The analyst explained that currently, CGT rates are set at 10% for basic-rate taxpayers and 20% for higher and additional-rate taxpayer, or a respective 18% and 28% where gains relate to residential property.
"Such a shift could both simplify the system and raise tax revenue - particularly if the annual exempt amount, currently set at £12,300, is either slashed or abolished altogether," he added.
"Any attempt to attack CGT would inevitably face stiff resistance from Conservative backbenchers. However, with the Treasury needing to raise funds to pay for its Covid-19 response and a huge Parliamentary majority, the government may feel CGT cuts are among its least-worst options."
Sean McCann, chartered financial planner at financial advisers NFU Mutual, welcomes the review, given that "there are many traps with CGT that can spring nasty surprises".
"Few people realise that they may have to pay CGT when they give away property, shares, or other investments," he reasoned. "For example, if a parent gives a second property or a portfolio of shares to their children in order to help them out, that counts as a disposal and could be liable for Capital Gains Tax.
"It is also possible that gift could be hit with a subsequent Inheritance Tax charge if the parent dies within seven years of making it. Those that hold onto everything until death see the capital gains slate wiped clean and only have to worry about IHT."
He added: "Given the economic situation facing the younger generation due to the coronavirus pandemic, it would make sense to simplify the rules to encourage the older generation to pass on wealth during their lifetime."
According to The Treasury, contributions from CGT under the current rules are expected to reach £15.7bn during the 2023/24 tax year. The following year, it predicts that it will collect £17bn.
CGT currently provides more cash to the Treasury than tobacco duty and will likely overtake alcohol duty by 2023/24.