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25 February 2021

I’ve made big paper gains. But should I stick or twist?

Frequently Asked Business Question:

I have several investments on which I have made large paper gains. Should I cash them in now or wait until after the budget?

Top Tip:

Your dilemma is similar to the “pontoon” card player who either has to do nothing (stick) or take action (twist). The similarity between pontoon and capital gains tax is the magical number of 20 which is a very strong pontoon hand and also a very favorable rate of capital gains tax currently being enjoyed by wealthy UK taxpayers. The Chancellor commissioned a review of capital gains tax during 2020 which was undertaken by the Office of Tax Simplification or OTS. The recommendations of the OTS report are radical to say the least and if implemented, would herald the biggest change in CGT since either its introduction by Jim Callaghan in 1965 or its significant reduction in 2008. Prior to the 2008 tax year, capital gains were taxed at the top slice of one’s income which if implemented today, would carry a CGT rate of 45% instead of the rate of 20% which is paid by higher rate taxpayers.

To add insult to injury, if disposals are carefully timed and depending on the nature of what is being disposed off, the payment of CGT can be deferred for up to 22 months compared to the poor PAYE workers who pay their income tax every week!. We have already seen this anomaly being chipped away at however with CGT on residential property gains having to be paid within 30 days of sale since 6 April 2020.

The OTS proposals include the reduction by over £10k from the annual CGT allowance of £12,300, the removal of capital gains tax reliefs around entrepreneurship, aligning income tax and capital gains tax rates to make them “simpler and fairer” and removing the “death free uplift” for inherited assets. This latter relief means that if you inherit an asset that has a large capital gain attached to it, the capital gain is extinguished at the date of death of the deceased and you inherit it at its market value meaning that on its immediate disposal, you have no capital gains tax to pay. This factor combined with the ability to have an estate of £1m which is not charged to inheritance tax in the UK, means that capital assets can move from generation to generation without suffering any form of capital tax. It is highly likely that this will change in the future, if not in the forthcoming budget on 3rd March.

Last year, relief for entrepreneurship (Business Asset Disposal Relief) cost the Treasury £2.7bn and it is estimated that the alignment of income and capital gain taxes would raise £14bn. The UK has approximately 32 million income taxpayers of whom less than 1% make capital gains each year. It is therefore likely to be politically more palatable to increase capital taxes such as CGT in the forthcoming Budget rather than increase income tax and corporation taxes which may have negative effects on economic activity.

Given the huge £400bn deficit faced by the Chancellor, capital taxes are likely to be an easy target and therefore, you should strongly consider disposing of your investments before Budget day as changes to capital gains tax could be made overnight and not effective from 5 April, the end of the current tax year. One thing that is almost certain is that CGT rates will not be reduced.

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The advice in this column is specific to the facts surrounding the questions posed. Neither PKF-FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.

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Paddy Harty / Tax Director

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