HMRC has released Capital Gains Tax (CGT) figures for the 2020-21 tax year (and some statistics for the 2021-22 tax year), highlighting the rise in income of the CGT compared to previous years.
HMRC statistics show that £14.3 billion was generated by CGT during this period, representing a 42% increase on the 2019-20 tax year. This was generated by gains of £66.6 billion from (largely liquid) assets worth £145.2 billion, giving an approximate overall effective rate and loan of 20 %.
The figures illustrate a significant increase in earnings and HMRC recognizes an unspecified and perhaps counter-intuitive impact of the Covid-19 pandemic on the tax base. The specific factors are not discussed in detail by HMRC.
Interestingly, the breakdown of the numbers highlights the role of relief for the disposal of commercial assets (BADR) and the broader broadening of the tax base in residential property disposals.
BADR – good news for the Exchequer?
HMRC figures show a 60% drop in the number of BADR claims in 2020-21. BADR replaced contractor relief on 6 April 2020. The original lifetime limit for eligible BADR claims was £10 million, echoing contractor relief. This amount was reduced to £1million in March 2020, and the HMRC figures reflect what had been anticipated by this reduction: an increase in the amount of taxable capital gains due to the reduction in the qualifying amount allowed under relief.
This is supported by the fact that the number of BADR requests (47,000 in the 2020-21 tax year) has remained stable over the past three years. On the other hand, while the number of claims remained constant, the share of BADR disposals within the framework of the total CGT fell to 8%, compared to 28% in 2019-20.
A consistent theme applicable to CGT is that those who bear the majority of the total tax are a small, concentrated class of individuals, with disproportionately larger earnings. This applies at a macro level in addition to BADR specifically. HMRC estimated a figure of 62-64% of BADR tax coming from 17% of people with qualifying earnings 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 earnings of £5m or more. In context, this category of individuals is equivalent to 1% of the total taxpayers (just over 3000 people), which essentially shows that it is 1% of the taxpayers representing approximately almost half (approximately 7 billion pounds sterling) of the amount of capital gains. In terms of tax policy and application from a tax point of view, can we deduce (subject to discussions on the rates) that the CGT and the relief in particular are well targeted?
HMRC introduced the Property Declaration Service in the UK in April 2020. As of 6 April 2020, all UK residents with residential property in the UK must declare CGT within 60 days (this was initially 30 but increased in October 2021).
Notably, HMRC figures show that in the 2021-22 tax year the service was used by 129,000 taxpayers, filing 137,000 returns and accounting for 141,000 disposals. This suggests that the uptake of the service has been strong and also matches the market trend of an increased number of residential real estate transactions after the first year of the pandemic. It may also suggest that more taxpayers are using the online service rather than the self-assessment, which facilitates the ability to formulate more accurate statistics.
Residential property has been seen as a particular area of CGT ‘leakage’ and measures such as the non-resident CGT have been introduced to target this in recent years.
Interestingly, figures from the HMRC Reporting Service suggest that the proportion of CGT accounted for by residential property may not be as large as previously thought (and certainly less than the business and professional fees generated by the council would not interconnect), with the amount of CGT generated by this service being around £1.7 billion.
It will be interesting to see how the broader CGT statistics for 2021-22, once released, compare to previous years.