As per the Office for Tax Simplification’s new report, the rates of the current Capital Gains Tax are quite complicated and must be aligned with the income tax rates. But what implications does it have for landlords? It cannot be disputed that Capital Gains Tax has been a political driving force for years. Individuals who invest in property or own it regard Capital Gains Tax as a punitive burden. Meanwhile, others believe it is an opportunity for them to target tax rises. The government is currently spending quite freely to strengthen the economy and businesses amidst the ongoing COVID-19 pandemic. This could result in an increase in Capital Gains Tax to make that happen. The Chancellor is expected to share a full budget by next spring which will then reveal the government’s plan repaying the massive debt incurred in 2020 due to the pandemic.
What Does The Office For Tax Simplification Want To Solve?
George Osborne, the then-Chancellor founded the Office for Tax Simplification to find ways of making the tax system of the country less complex. Rishi Sunak asked the Office for Tax Simplification in July 2020 to pay special attention to Capital Gains Tax, saying that he wanted this review to study Capital Gains Tax and advise regarding opportunities that could simplify the otherwise complicated taxation of chargeable gains. He also mentioned that he would be interested in proposals from the Office for Tax Simplification on a new regime of exemptions, reliefs, allowances, the treatment of losses within Capital Gains Tax as well as the interactions on the way in which gains are tax in comparison to other income types.
In the United Kingdom, Capital Gains Tax is charged for most taxable assets at 10% and 20% and for residential property other than a person’s primary residence at 18% and 28%. This also includes rental property. On the other hand, income tax in Northern Ireland, Wales and England is charged according to your earnings at 20%, 40% and 45%.
What Are The Recommendations Of The Office For Tax Simplification?
According to a report released by the Office for Tax Simplification, “The rate disparity can distort business and family decision-making, and it creates an incentive for taxpayers to arrange their affairs in ways that effectively re-characterise income as capital gains. Most gains are concentrated among relatively few taxpayers, who also tend to have more flexibility about when they dispose of their assets. This can mean they pay proportionately less tax on their overall income and gains than others.”
In other words, the Office for Tax Simplification argues that putting Capital Gains Tax in line with the rates of the income tax could help raise an additional £14 billion yearly for the Treasury. This would amount to £70 billion over a period of five years. Of course, most of that additional money would come from individuals who own multiple properties, irrespective of whether they are Airbnb owners, residential landlords or second-homers. The Office for Tax Simplification also suggested a reduction in the tax-free, annual Capital Gains allowance of £12,300, citing a threshold of £5,000 as an alternative example. If it is set at that level, the number of people who would need to pay Capital Gains Tax will be doubled.
Is It Going To Pose A Problem For Landlords?
The first and foremost thing to remember here is that it is not set in stone. The Chancellor might not agree with the suggestions of the Office for Tax Simplification. The final decision will rest with the Chancellor. In fact, history suggests that if enough outcry happens, particularly from the individuals whose votes might help him with the next election, the Chancellor might offer a compromise. That said, we know that he’s looking to get back at least a portion of the £210 billion that was spent on the COVID-19 support. It is also not noteworthy that Capital Gains Tax affects a small number of taxpayers which is why it is regarded as an easy target. However, if the change does take place, landlords will be hit significantly.
So, What’s Next?
All that is left to be done now is to wait for the decision of the Chancellor. You can also write to the local MP if you’re so minded. Meanwhile, we will watch the happenings in this arena closely to keep you updated. In case the Chancellor decides to accept the recommendations in the report, we, at DNS Accounting Group, will be here to advise our clients on all their options when the new rates come into effect. Typically, we strongly recommend all landlords to resist their urge to sell because a rental property is a smart long-term investment.
Get in touch with us at DNS Accounting Group today to understand the implications of this law on your business!