HMRC report rise in capital gains tax
HMRC’s statistics show that £14.3bn was generated through CGT in this period, which represents an increase of 42% compared to the tax year 2019-20. That was generated off gains of £66.6bn from (largely liquid) assets worth £145.2bn giving a rough and ready all-inclusive effective rate of 20%.
The figures illustrate a significant increase in gains and HMRC acknowledge an unspecified and perhaps counterintuitive impact of the Covid-19 pandemic on the tax base. Specific factors are not discussed by HMRC in detail.
Interestingly, the breakdown of the figures sheds light on the role of business asset disposal relief (BADR) and the broader expansion of the tax base in residential property disposals.
BADR – a good news story for the Exchequer?
HMRC’s figures show a 60% fall in the number of BADR claims in 2020-21. BADR replaced entrepreneurs’ relief on 6 April 2020. The original lifetime limit for eligible BADR claims was £10m, echoing entrepreneurs’ relief. This was reduced to £1m in March 2020, and the HMRC figures reflect what had been anticipated by this cut: an increased amount of taxable capital gains due to the reduction of the eligible amount allowed under the relief.
This is corroborated by the fact that the number of BADR claims (47,000 in the 2020-21 tax year) has remained stable in the most recent three years. Contrastingly, whilst the number of claims have remained consistent, the proportion of BADR disposals in the context of total CGT has fallen to 8%, compared with 28% in 2019-20.
A consistent theme applicable to CGT is that those bearing the majority of the total tax liability are a small, concentrated category of individuals, with disproportionately larger gains. This applies at a macro level in addition to BADR specifically. HMRC have approximated a figure of 62-64% of BADR-sourced tax coming from 17% of individuals with qualifying gains of £500,000 or more. In terms of broader CGT figures, in 2020-21, 45% of the total amount of CGT was paid by individuals making gains of £5m or more. In context, that category of individuals equates to 1% of total taxpayers (a little over 3000 people), essentially showing that it is 1% of taxpayers accounting for around almost half (about £7bn) of the amount of capital gains. In terms of tax policy and applying the taxman’s perspective, can we infer from that (subject to discussions about rates) that CGT and the relief in particular are appropriately targeted?
HMRC introduced the UK Property Reporting Service in April 2020. Since 6 April 2020, all UK residents disposing of UK residential property have had to report CGT within a period of 60 days (this was initially 30 but increased in October 2021).
Notably, HMRC’s figures show that in the tax year 2021-22 this service was used by 129,000 taxpayers, filing 137,000 returns and representing 141,000 disposals. This suggests that uptake of the service has been strong, and also accords with the market trend of an increased number of residential property transactions following the first year of the pandemic. It may also suggest more taxpayers are using the online service as opposed to self-assessment, which facilitates the ability to formulate more accurate statistics.
Residential property has been thought to be a particular area of CGT “leakage” and measures such as non-resident CGT have been introduced to target this over the past years.
Interestingly, the figures from HMRC’s reporting service suggest that the proportion of CGT accounted for by residential property is perhaps not of as much significance as had been thought (and certainly less than the activity and professional fees generated by the advice would intermate), with the amount of CGT generated through this service being approximately £1.7bn.
It will be interesting to see how the wider CGT statistics for 2021-22, once published, compare to previous years.