Osborne’s struggle to balance the books: Will the Chancellor target capital gains tax in the Autumn Statement?

The Chancellor could target capital gains tax for extra revenue when he delivers his Autumn Statement next week as gains from investors and landlords hit their highest on record in the past financial year, accountants suggest.

George Osborne, who will unveil his spending plans for Britain next Wednesday, is under pressure to balance the books, with public finance data yesterday showing that government borrowing shot up more than expected in October.

Capital gains, or profits made from the sale of assets such as property and shares, rose to £32.1billion last year from £23.5billion in 2012-13, marking their highest level on record, according to recent Government figures.

However, the proportion of tax taken from those gains was only 17.1 per cent – despite much of them falling on higher rate taxpayers, according to Stephen Berry, chartered financial planner at NFU Mutual.

‘Capital Gains Tax must now be under consideration by George Osborne,’ he said.

‘It’s one area of people’s finances that he’s left relatively untouched and he’s under yet more pressure to balance the books.’

The sale of assets such as property, as long as it’s the main home, and investments held outside Isas or pensions usually attract CGT if they are sold at a profit.

CGT is levied at 18 per cent 28 per cent depending on whether people are basic rate or higher rate taxpayers, however, gains are added to income to deliver a total amount that decides this.

HOW CAPITAL GAINS TAX WORKS FOR HOMEOWNERS

If you are an owner occupier you do not have to pay capital gains tax on your home, which is officially termed their principal private residence. However, the taxman may want evidence that you were actually living there.

But when you come to sell a secondary property – a second home, a buy-to-let property or a holiday let – there will be capital gains tax to pay on any profits.

CGT kicks in when you sell a property at a profit of more than the annual allowance, currently £11,100 in 2015/2016. This can be combined to £22,200 for married couples or civil partners.

CGT is levied at 18 per cent or 28 per cent depending on whether people are basic rate or higher rate taxpayers. However, gains are added to income to deliver a total amount that decides this. This means that in practice most landlords making decent profits should pay the 28 per cent rate.

While second homes do incur the tax, an exemption means that if at any point that property has been its owners’ only or main residence, only the last 18 months of ownership qualify for private residence relief – that period of ownership does not incur CGT.

A further element called lettings relief can further reduce capital gains tax, which combined with the annual CGT allowance can often take bills down to zero.

Letting relief is worth the lowest of three amounts: private residence relief already claimed, the value of the increase in capital gains which occurred during the period when the property was being let, or £40,000.

There are also reliefs, such as entrepreneurs’ relief which reduces the rate to 10 per cent on the sale of certain business interests. Berry said that some entrepreneurs may pay CGT at just 10 per cent on up to £10million of gains.

Everyone has a capital gain allowance, which for the current financial year is £11,000 and for the next will rise to £11,100. Spouses can merge their allowances, meaning that a couple this year will not start paying CGT until their gains are over £22,000.

Berry said Osborne could make changes to either the allowances or to the rates at which CGT is taxed in a bid to rake in extra revenue.

‘Any rise in CGT would mean people selling assets – or even giving them away – could be hit much harder,’ he added.

Aidan Sutton, tax partner at PwC, said: ‘Capital gains tax is paid at 28 per cent.There are also reliefs e.g. entrepreneur’s relief which reduces the rate to 10 per cent on the sale of certain business interests. You would therefore expect the effective rate to be somewhere between 10 and 28 per cent.’

Berry said sellers shouldn’t act in haste as a planned and structured approach could reduce or eliminate a CGT bill.

He added: ‘Astute investors are already using their annual tax free allowance every year and, where possible, transferring assets to use their spouse’s annual allowances as well. If a husband, wife or civil partner pays a lower rate of income tax, they could pay a lower rate of Capital Gains Tax too.’

WHAT CAPITAL GAINS TAX MEANS FOR INVESTORS

Capital gains tax is a charge you pay on profit when you sell any investments such as funds or shares.

You only have to pay CGT on your overall gains above your tax-free allowance each year. This is £11,000 for the 2015/2016 tax year and will go up to £11,100 from April 2016.

Currently, there are two different rates of CGT. Basic rate taxpayers pay 18 per cent, while higher rate taxpayers pay 28 per cent.

If your gain takes you over the tax threshold, you pay the higher rate.

Your gain is usually defined as the difference between what you paid for your asset and what you sold it for. You can reduce this by minus any dealing fees as well as stamp duty when it comes to shares.

You can limit the amount of capital gains tax you pay by putting eligible investments in tax-free savings such as an Isa.

Since the Conservative Party won an outright majority in May’s national election, Osborne has intensified his focus on deficit reduction, and wants the country to run a budget surplus by 2019/20.

In this light, it seems likely that Osborne will largely stick to his tough spending plans and confirm further fiscal tightening.

Accountants at PwC said: ‘Tax credits have featured heavily in the run up to the Autumn Statement and although there could be some softening of the policy, with the promise of “transitional” help to those affected, we could see instead further cuts for unprotected Whitehall government departments and local authorities in England.’

They also said that since there has been a lot of attention on a drop in revenue from stamp duty since the rates were increased, these might be reduced again.

‘If the Chancellor believes the increased rates have served their intended purpose of slowing down the escalating property market, particularly in the capital, he could potentially reduce the higher rate once again,’ PwC said.