It seems likely that the next UK Budget will be delivered by Rachel Reeves who will be the first Labour Chancellor of the Exchequer since Alistair Darling, says Gerry Brown, trust and estate planning consultant at QB Partners.
In its election manifesto the Labour Party has promised not to increase income tax, national insurance contributions or VAT. No such commitment was made in respect to capital gains tax (CGT) beyond the exclusion of gains on an individual’s primary residence.
The Labour manifesto promised two tax measures with CGT implications.
The current regime for resident non-doms will be radically recast. This will mean the end of the remittance basis of taxation which applied equally to capital gains as well as income. It seems reasonably clear that some relief from UK tax for gains on non-UK assets made by ‘short term UK residents’ will be introduced. The details of this relief may have to wait until the first Labour Budget. Perhaps there will be some consultation exercise before legislation is introduced.
Labour has also promised to change the tax treatment of ‘carried interest’ moving the profits generated from the CGT regime (where the applicable rate would be 28%) to the income tax regime (where the applicable rate would be 45% with an additional 2% NIC charge). A ‘carried interest’ is an investment by private equity or hedge fund managers (alongside client investors) acquired at a preferential cost. It is effectively a performance fee. The tax analysis can be complicated. It may be that some of those affected would simply leave the UK should the current treatment change. It is claimed that the current treatment ‘costs’ the government approximately £600 million annually although the number of individuals able to take advantage of this beneficial treatment is believed to be small.
There are other aspects of the CGT legislation which might be changed by a new government. Business Asset Disposal Relief (BADR) is a relief (currently exempting gains of a cumulative lifetime amount of £1million) given on a disposal of a business or businesses. The rules surrounding entitlement to this relief are particularly complex. It has been argued that the relief has no economic justification – it does not encourage investment – and should be abolished. CGT reliefs on business disposals have been around since the introduction of the tax in the 1960s and BADR follows in the footsteps of retirement relief and entrepreneurs’ relief.
The interaction between capital gains tax and inheritance tax (IHT), in situations where assets owned at death qualify for 100% business relief, has been the subject of much discussion. The availability of business relief means that there is no IHT charge on death in respect of qualifying business assets and the deceased’s heirs inherit those assets with a CGT ‘cost’ of the market value at date of death. Growth in the value of those business assets has escaped both inheritance tax and CGT on the increase in value during the deceased’s period of ownership. It has been argued that this can’t have been the government’s intention when raising the rate of business relief to 100% in 1992. Previous administrations, of both political hues, have ignored this anomaly but perhaps a new, reforming, Chancellor will rectify it.
Finally our incoming Treasury team might want to look at the rates of CGT. We currently have five rates. Higher or additional rate taxpayers pay;
● 24% on gains from residential property
● 28% on gains from carried interest
● 20% on gains from other chargeable assets
The rate applying to basic rate taxpayers depends on the amount of the gain, the individual’s taxable income and the nature of the asset disposed of – residential property or other chargeable assets.
Is there scope for simplification?
By Gerry Brown, trust and estate planning consultant at QB Partners
