What is capital gains tax? Who it applies to and why rates could increase following a review commissioned by Rishi Sunak

Cutting exemptions and increasing rates could help the Government recouped billions in debt – but will it affect you?

A report commissioned by Chancellor Rishi Sunak has suggested doubling capital gains tax rates could raise £14 billion for the Treasury.

The review – ordered by Mr Sunak in July – recommends cutting exemptions and increasing rates to bring them into line with income tax, as the Government looks to pay back billions of pounds borrowed to support the economy through the Covid-19 crisis.

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Any changes to the tax would primarily affect wealthier people who own second homes or assets not shielded from tax.

Doubling Capital Gains Tax rates could raise £14 billion for the Treasury (Photo: Shutterstock)
Doubling Capital Gains Tax rates could raise £14 billion for the Treasury (Photo: Shutterstock)

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Here is everything you need to know.

What is capital gains tax?

Capital gains tax is a tax on the amount of money an individual or business makes when they sell or dispose of an asset that has increased in value.

Rishi Sunak has previously suggested he would do everything he could to avoid a "horror show of tax rises with no end in sight" (Photo: Stefan Rousseau-WPA Pool/Getty Images)

‘Disposing’ of an asset includes selling it, but also covers giving away an asset as a gift or transferring it to someone else, swapping it for something else, or getting compensation for it - like an insurance payout if it’s been lost or destroyed.

Tax is paid based on the amount of profit made in the transaction, not the total sum of money received.

The Government uses the example of a painting bought for £5,000 and sold later for £25,000. A gain of £20,000 was made here, and this is the amount of money that would be subject to capital gains tax.

Capital gains tax is paid on most personal possessions worth £6,000 or more (apart from your car), property that’s not your main home (unless you’ve let it out, used it for business or it’s very large), shares that are not in an individual savings account or personal equity plan, and business assets.

You only have to pay the tax on your total gains above an annual tax-free allowance, and you do not usually pay tax on gifts to a husband, wife, civil partner, or charity.

For more information on capital gains tax, head to the Government’s website

Why might the Government increase rates?

Both central and local Government have invested billions of pounds in trying to help people and the economy through the Covid-19 pandemic, with the national debt passing £2 trillion for the first time ever in July.

That money needs to be recouped from somewhere, and it is suggested that if the Government were to implement the report’s recommendations, it could raise £14 billion for the Treasury.

However, it is not known how accurate that figure may be, and it is thought making the change would not necessarily raise all of that money, as people would change their behaviour.

The system as it stands is relatively easy to game, as one can control when an asset is sold and a gain is made, and arrange affairs so any gain made comes in just under the threshold.

In September, Mr Sunak told his fellow Conservatives the Government would need to do “some difficult things”, but promised against “a horror show of tax rises with no end in sight."

The report will be followed by another examining the technical and administrative issues, and is due early next year, but the Treasury is not obliged to follow the findings.

What are the current rates and exemptions?

You currently only have to pay capital gains tax on your overall gains above a tax-free allowance of £12,300.

If you’re a basic rate taxpayer, the rate you pay depends on the size of your gain, your taxable income and whether your gain is from residential property or other assets.

Higher or additional rate taxpayers pay 28 per cent on gains from residential property, and 20 per cent on gains from other chargeable assets.

Will the change affect me?

The news of an increase in capital gains tax rates and cuts to exemptions might have you worrying that you’ll need to pay more to the Government.

But the reality is any changes are unlikely to affect the general population, and would primarily affect wealthier people who own second homes or assets not shielded from tax.

"In most years, most of us won't pay it,” says Andy Verity, the BBC’s economics correspondent. “In fact, even if the number of people paying it trebled, it probably still wouldn't be you.”