Capital gains hit and inheritance tax frozen

Chancellor Hunt has cut the capital gains tax (CGT) annual exemption by over 75% and frozen all the inheritance tax nil rate bands for the 19th year in a row.

Capital gains tax

The CGT annual exemption will be cut from £12,300 to £6,000 with effect from 6 April 2023 and halved again to £3,000 in April 2024. 

The rates of CGT remain at 10% and 20% for most assets, but 18% and 28% for residential properties and carried interest, which is treated as a gain. However, there is scope for further announcements on CGT rates to be made in the 2023 Spring Budget. 

The CGT various reliefs have not been altered at this time, but again don’t count on all of those business reliefs still being in place by the end of this parliament.       

More customers 

This policy of raising tax by cutting allowances will bring more people into the CGT regime. Not only will inflation increase in the value of assets disposed of, but the double cut in the annual exemption will have a dramatic effect on the number of taxpayers who will need to report gains on their self assessment tax returns.

This extra administration will impact taxpayers who make modest gains by selling shares outside of an ISA wrapper or pension fund.

Individuals who sell second homes will find they have a double reporting burden. Where the taxpayer is a UK resident, they need to activate their UK Property Account, then pay any CGT due within 60 days of the completion date, as well as report the CGT calculation on their self assessment return. Non-residents are required to use the UK property account to report the disposal of UK land and property, whether a gain is made or not.

Who pays?

CGT is largely paid by the very wealthy. A research paper by Arun Advani (Warwick University) and Andy Summers (LSE law) shows that when ranking taxpayers by the amount of gains realised, the top 5000 received over half the gains made in the UK per year. These people are also in the top 1% of high earners.

However, many smaller investors rely on a mixture of tax-free capital gains and dividends to achieve a reasonable return on their modest investments. These individuals will be hit twice, and in two years running.  

In 2023/24 they will pay CGT on gains exceeding £6,000 and dividends in excess of £1,000 per year. Then in 2024/25 such small investors need to report gains made over £3,000 and pay tax on dividends over £500 received in the year.  

Business owners who are planning to sell their business need to consider whether accelerating that process to before April 2023 would beneficial, so they can take advantage of the higher CGT exemption on offer in this tax year. 

Anti-avoidance measure

There was one CGT avoidance measure announced in this Autumn Statement, which relates to share-for-share exchanges made between a UK business and an overseas company. 

This ruse only works if the taxpayer is non-domiciled and can thus avoid UK CGT on gains realised in other countries. The shares in the UK company, which are carrying a gain, are exchanged for shares in a non-UK holding company. This moves the gain off-shore, and hence out of the UK CGT regime for a non-dom who uses the remittance basis. 

From 17 November 2022 the overseas shares acquired in such a share-for-share exchange will be treated as UK shares, so the gain in the UK company does not escape the UK tax net.   

Inheritance tax 

The inheritance tax nil rate band was fixed at £325,000 per person in April 2009, and it will now remain at that level until April 2028. 

The residence nil rate band, which was introduced in 2017/18 at £100,000, then gradually rose to £175,000 in 2020/21, will also be fixed at that level until April 2028. The residence nil rate band can only be claimed where the deceased’s main home is left to a direct descendant, step-child or adopted child. It thus discriminates against the childless.