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15 July 2020 16:36

Labour Party School Student

What is capital gains tax and why is it being reviewed?

Rishi Sunak has ordered a review into capital gains tax, as the Chancellor faces the prospect of plugging a £322bn black hole caused by coronavirus. The review will be broad and will assess exemptions, rates and reliefs, including the 0pc rate that applies to people selling their main home. Capital gains tax is currently levied for higher-rate and additional-rate taxpayers at 20pc on the sale of assets such as shares and at 28pc for residential property that is not a primary home. Today, it would leave a higher-rate taxpayer making a gain of £50,000 on the sale of a second home with a tax bill £6,000 higher than under the current system, according to analysis from accountants Blick Rothenberg. Telegraph tax columnist Mike Warburton said one of the most likely changes could be scrapping the nine-month tax-free period between buying a second home and selling a main home, which can be used by people with more than one home to avoid CGT when they buy and sell properties.

Someone with a gain of £100,000 who sold their main property nine months after moving out of their former home would have to pay £7,500 in CGT, according to Blick Rothenberg's figures. Scrapping the 0pc rate of CGT for people selling their main residence altogether is unlikely, experts have said, as it would put people off moving home. Abolishing this relief would mean a higher-rate taxpayer paying 28pc on any gain in the property's value since purchase, in excess of the £12,300 annual tax free allowance. The Office of Tax Simplification (OTS) will undertake the review of CGT and how the chargeable gains of individuals and smaller businesses are treated. He added: "I would be interested in any proposals from the OTS on the regime of allowances, exemptions, reliefs and the treatment of losses within CGT, and the interactions of how gains are taxed compared to other types of income." According to a report in The Times, the CGT review could mean the treasury collects billions of pounds in tax to pay for the pandemic.

Sunak's request for the CGT review came after an Office for Budget Responsibility (OBR) report "highlighted how the growing deficit in government spending was likely to exceed £350bn this year", says The Guardian. In a letter to the Office for Tax Simplification outlining the parameters of the review, Sunak said that he "would be interested in any proposals from the OTS on the regime of allowances, exemptions, reliefs and the treatment of losses within CGT, and the interactions of how gains are taxed compared to other types of income". The Chancellor has ordered a 'review' of capital gains tax, signalling a future raid on the wealthiest taxpayers to help pay the gigantic bill for combating Covid-19. Rishi Sunak's brief to the Government's tax gurus includes looking at whether the levy on asset sales is 'fit for purpose', ways it can 'distort behaviour', and the current regime of allowances, exemptions and reliefs. That all translates as 'tax grab', so what might it mean for people's wealth held in investments, property and other assets that are - and currently aren't - subject to capital gains tax?

The Chancellor has asked the Office of Tax Simplification, an independent arm of the Treasury, to identify opportunities to simplify capital gains tax in relation to individuals and small businesses. Capital gains on assets ranging from shares to second homes and buy-to-lets are traditionally taxed at lower levels than income because people are taking a risk - whether an entrepreneurial one, or via their investments. The rates are 18 per cent and 28 per cent respectively for capital gains made on residential property - excluding main residences, meaning those people live in. Aligning CGT and income tax: Gains from investments and dividends, and property aside from people's own homes, are taxed differently from earned income for the reason given above. Labour proposed bringing CGT into line with income tax rates, which would mean big hikes for higher earners and smaller increases for basic rate taxpayers, in its 2019 election manifesto.

And last year, influential think-tank the Institute for Public Policy Research also suggested CGT on people's wealth tied up in assets like investments, second homes and buy-to-lets should be hiked to income tax levels. Changing 'main residence' relief: The OTS is bound to look at this, but hitting people selling their own homes with CGT would spark a storm of opposition. 'This can put people off passing on assets to the next generation during their lifetime,' said the OTS in its inheritance tax report. But questions were raised over how this would work in practice, and whether it would only apply to businesses and agricultural property and farms cited in the report, or could lead to people who hold onto an inherited property facing big capital gains tax bills. Meanwhile, 'exemption at death' encourages people to hold assets for life to allow beneficiaries to avoid CGT, although they may still be liable for inheritance tax. 'CGT already provides more cash to the Treasury than tobacco duty and will soon outstrip alcohol duties too.' Comparing chargeable gains before exemptions to actual money raised implies an average tax rate of just 15 per cent, according to AJ Bell analyst Tom Selby. Tom Selby, senior analyst at AJ Bell, says: 'With UK borrowing set to hit its highest level in peacetime history, Chancellor Rishi Sunak's request for a review of CGT feels like the starting pistol for a tax grab ahead of the autumn Budget later this year. CAPITAL gains tax is the money you pay to HMRC when you sell something that has gone up in value, such as stocks and shares, artwork or even a second home. Historically, the rates you pay are quite low and there are lots of exemptions, but chancellor Rishi Sunak is considering changing the rules to help plug holes in the UK's finances left by the coronavirus crisis. You pay capital gains tax, also known as CGT, on the profits you make when you dispose of certain items that have gone up in value. Giving your assets away doesn't exempt you from paying capital gains tax unless it goes to a certain set of people. If you have sold a property the deadline is sooner though, and you must report and pay capital gains Tax within 30 days. The rate of capital gains tax on buy-to-let properties and second homes is for basic rate taxpayers is significantly higher - you need to pay 28 per cent of your taxable gains. It is not yet known what measures could be introduced, but the chancellor is thought to be considering changing or scrapping some reliefs and exemptions, such as the one for people selling their main residence eg, their home.