Five ways Rishi Sunak could change capital gains tax and what it would cost you

Rishi Sunak has ordered a review into capital gains tax, as the Chancellor faces the prospect of plugging a £322bn black hole caused by coronavirus.

It has prompted speculation that the Chancellor is planning sweeping policy reforms to raise revenue as the country’s spending in the wake of the Covid-19 pandemic approaches £1 trillion for the first time in history and a struggling economy stifles the state’s tax income.

HM Treasury insisted the sudden announcement was part of a standard internal audit of the system.

CGT raises less than £9bn a year from just 300,000 people, making up less than 1pc of Treasury income. Income tax, the Government’s largest single source of revenue, generates almost £200bn.

The review will be broad and will assess exemptions, rates and reliefs, including the 0pc rate that applies to people selling their main home.

Capital gains tax is currently levied for higher-rate and additional-rate taxpayers at 20pc on the sale of assets such as shares and at 28pc for residential property that is not a primary home.

Basic-rate taxpayers are charged CGT at 10pc and 18pc respectively, but only if the taxable proceeds from the sale added to their income is less than £50,000, the basic-rate income tax threshold. Any gain above this is paid at the higher rate.

These are the five policy changes experts think are most likely and what the cost would be to the taxpayer.

Increasing rates in line with income tax

Pundits have suggested bringing the main CGT rates in line with income tax, payable at 20pc for basic-rate payers, 40pc for higher-rate earners and 45pc for additional-rate taxpayers. The current difference between the two rates gives wealthier taxpayers an incentive to take their income from investments gains.

Former Chancellor George Osborne increased the top rate from 18pc to 28pc in 2010 to reduce this incentive and calculated that the Government would make roughly £60m for every one percentage point reduction in the gap between the two levies.

Today, it would leave a higher-rate taxpayer making a gain of £50,000 on the sale of a second home with a tax bill £6,000 higher than under the current system, according to analysis from accountants Blick Rothenberg.

Reducing CGT breaks in line with the dividend allowance

Lowering the £12,300 annual CGT allowance to bring it in line with the £2,000 dividend allowance would again reduce the incentive to take income in the form of gains.

The £10,300 decrease in the exempt amount would mean an increased tax bill of almost £2,900, assuming the same £50,000 gain on the sale of a second property.

Scrapping the nine-month tax-free extension

Telegraph tax columnist Mike Warburton said one of the most likely changes could be scrapping the nine-month tax-free period between buying a second home and selling a main home, which can be used by people with more than one home to avoid CGT when they buy and sell properties.

If this was scrapped, an individual would have to sell the moment they moved out. The capital gain would be time-apportioned to reflect the loss of main residence relief.

Someone with a gain of £100,000 who sold their main property nine months after moving out of their former home would have to pay £7,500 in CGT, according to Blick Rothenberg’s figures. Under the current regime, they would pay nothing.

Scrapping £40,000 lettings relief

Mr Warburton said another possibility would be the scrapping of the £40,000 tax-free allowance on gains where a main home, or part of it, is rented out for a time before it is sold.

It would mean an additional tax cost of £11,200, based on the main 28pc rate.

Abolishing primary residence relief

Scrapping the 0pc rate of CGT for people selling their main residence altogether is unlikely, experts have said, as it would put people off moving home. It would act against the Chancellor’s temporary stamp duty holiday announced in the summer Budget last week, which is designed to re-energise the housing market.

Abolishing this relief would mean a higher-rate taxpayer paying 28pc on any gain in the property's value since purchase, in excess of the £12,300 annual tax free allowance. Scrapping the relief would provide a large boost to how much the tax generates, adding between 100,000 and 200,000 residential property transactions into the tax net each year.

George Bull of tax firm RSM UK said it was more likely the Chancellor could introduce a limit to the relief in the form of a new lifetime allowance.