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Government needs to reintroduce indexation relief if it raises CGT rates

Plans to review Capital Gains Tax (CGT) have raised speculation that headline rates may be increased later this year.

Boodle Hatfield, the leading private wealth law firm, says that if the Government increases CGT rates, it should also consider bringing back indexation relief. This relief was designed to spare individuals being taxed on gains which arose purely as a result of inflation. At present investors can be charged CGT even though they have made no real gain (i.e. after inflation).

The indexation allowance for individuals was scrapped under Gordon Brown in 2008. One reason the headline rates of CGT are lower than the income tax rates is to compensate for the abolition of indexation relief. 

Geoffrey Todd, Partner at Boodle Hatfield comments: “There is currently no distinction between short term gains and gains made on assets that have been held for a long time. That can be very punishing for individuals when they come to sell.”

“By reintroducing indexation relief, individuals would be able to exclude the effects of inflation from their chargeable gains when selling an asset such as a property.”

“If CGT rates are to be increased to income tax rates, there must be some thought given to reintroducing indexation relief. Otherwise, there is a risk that people will be deterred from selling or that investment will be disincentivised.”

“Particularly in times of economic hardship, the Government should be doing everything in its power to remove barriers to economic activity.”

Boodle Hatfield says that investors could consider selling off shares now in order to trigger CGT at a lower rate, if they feared that CGT is to rise. Investors could then buy back the same shares after 30 days have passed.

Buy-to-let investors will be amongst the groups most impacted by a CGT rates hike. Boodle Hatfield says that to avoid having to pay an enormous tax bill on the sale of an investment property, owners could consider splitting beneficial ownership.

Geoffrey Todd explains: “Rather than selling a property on the open market, an owner who is worried about CGT going up could give a share in it to his children. This would count as a part disposal and would trigger a gain at the present rate of tax."

This article was first published in This is Money on Friday 17th July 2020.

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