Written by Katharine Arthur, Head of Private Client, haysmacintyre
Alongside another rise in inheritance tax receipts (IHT), the most recent tax figures released by HMRC revealed further increases in the Capital Gains Tax (CGT) take.
That shouldn’t come as a surprise – inflation has been a key factor behind tax increases in recent years and CGT is no exception.
And further growth of CGT could very likely be on the horizon. As of 6th April 2023, the annual exemption for CGT has been reduced from £12,000 to £6,000 and a further reduction will come into force next April. The full effects of these reductions have not yet been reflected in CGT figures, but are not difficult to predict. With CGT receipts from the past 12 months alone bringing in £18bn, it isn’t particularly difficult to see the Treasury’s logic in lowering the annual exemption either.
After all, it will surely bring further funds into the Treasury’s coffers, with the Office of Budget Responsibility predicting that CGT will be worth an extra £8bn by 2027-28. However, there is a danger that the original purpose of the annual exemption is being overlooked, and that the consequences of this have not been fully considered.
CGT, at least traditionally, was considered a tax on the wealthy. The people paying it routinely were generally high net worth individuals, with substantial investments or other valuable assets. When it was paid by other members of society, for example because they had sold a holiday home or buy-to-let property, it was a one-off payment, perhaps to be repeated once or twice, but never as a matter of routine and typically as part of a larger transaction in which professional financial advice had been sought.
Whilst a gain of just over £6,000 on an investment– soon to be just over £3,000 –may not be commonplace, it will mean that hundreds of thousands of new taxpayers are now liable to pay CGT. Many may be unaware of that fact – a gift of shares or a property, for example, to a family member can create CGT liability. Others may know they have to pay but be unaware of how to properly file a Self-Assessment tax return or use HMRC’s Real Time CGT service, and unable to afford to seek professional financial advice. Investment managers and IFAs who have traditionally utilised a client’s Annual Exemption to realign portfolios and crystallise small gains, without any tax liability, will have to revisit their strategies.
With HMRC already badly overstretched, the addition of this administrative burden looks set to cause fresh headaches. After all, it is already struggling to deliver results. In January of this year, for example, the Public Accounts Committee delivered a highly critical report in which HMRC was held to account for failing to deploy sufficient resources to maximise tax revenues and provide an acceptable level of service.
Particularly troubling in light of the changes to CGT is that HMRC is already failing to collect around 5% of the tax it is owed annually, creating a £42 billion ‘tax gap’ in public finances. HMRC does have plans to improve service levels and is set to transition to a digital tax system. But that digital tax system will not be in place until at least 2030 and, even assuming digitisation, and the other plans in place, are enough to solve HMRC’s problems at a stroke, that still leaves HMRC facing a growing administrative burden it looks ill-equipped to bear for the next six years. There is also the concern that even more tax will be left uncollected as a result at a time when Britain’s public finances can hardly be described as being in rude health.
There is also the question of whether the effort will be worth the cost. A question that will only become harder to answer when the annual exemption drops again next year to £3,000. That reduction may drive an increase in total CGT receipts, but it will also cause the amount of CGT paid by many individual taxpayers to fall to what will in many cases be a negligible sum. That could put HMRC in the unenviable position of spending more collecting some CGT receipts than it is actually bringing in. Such a situation would also surely see the current ‘tax gap’ widen further, with HMRC possibly required to prioritise some of its tax collection responsibilities over others.
In short then, the volume of administrative work created by the increased volume of CGT receipts looks set to add pressure to an already creaking tax system. Pressure that HMRC may not be able to contend with effectively.