The chancellor this week (July 14) commissioned a review of CGT in relation to individuals and smaller businesses, asking the Office of Tax Simplification to consider the overall scope of the tax and the rates which apply.
It will also look at the reliefs, exemptions and allowances which apply to the gains tax.
The move comes after Mr Sunak put forward £30bn worth of policies and tax cuts, including a stamp duty holiday and VAT reductions, in his summer statement last week (July 8).
It is likely the chancellor is looking at ways to raise cash in order to balance the books as hundreds of billions of pounds has been spent on keeping businesses and households afloat amid the virus crisis.
Spooked investors
But some experts have warned any increase in the tax paid on capital gains would primarily hit investors, potentially putting some people off investing entirely.
Scott Gallacher, adviser at Rowley Turton, said: “I get nervous when any chancellor announces a review of tax, as I doubt they are looking to cut taxes, especially in the current situation.
“Any rise in capital gains would hit many investors, and might put some people off investing entirely.”
Mr Gallacher also warned that any fall in UK investor money would likely be replaced by a rise in foreign investments, meaning there was a risk UK plc would be “almost entirely owned by overseas investors” with profits from UK companies flooding out of the country.
Ben Yearsley, investment consultant at Fairview Investing, agreed, noting that CGT was “the one tax that was almost voluntary” as in most cases people made an “active decision” to sell.
He added: “Therefore, if CGT rates increased it is entirely likely that investor behaviour would change and the tax take would fall.”
Mr Yearsley thought a general increase in tax was “on the cards”, but argued a wealth tax would be “counterproductive, complex and hard to implement”.
The chancellor was also keen to ascertain the relationship between CGT and other parts of the tax system, in particular how gains are taxed compared to other types of income.
Homes under the hammer
Mr Sunak has already slashed entrepreneurs' relief, limiting the allowance to £1m at his debut Budget in March, but other benefits — such as the principal private residence relief, which means consumers are not taxed on the sale of their main home — fall into the scope of this review.
Some advisers welcomed this aspect of the review.
Felix Milton, financial planner at Philip J Milton and Company, said: “I’m excited by the prospect that people could have to start paying CGT on their main home gains as frankly, it really annoys me that this exemption is a thing.
“It could make property affordable to everyone, especially for the young, and is a great way of raising tax revenue to bail us out after the coronavirus spending.”
Martin Stewart, director of the Money Group, agreed, saying the fact the “golden goose” of residential property remained “out of reach” from tax was an “outdated thought process”.
He said: “We are in a permanent debt-driven era and we may have no alternative to tax the crown jewels of home ownership. Most people won't like this concept, they prefer to pay to fund the NHS through 2 minute standing ovations.”
Tweaks needed
Some were less radical in their thinking but were still onboard with a shake up to the capital gains structure.
Alistair Cunningham, financial planning director at Wingate Financial Planning, said the problem with CGT was that it made no allowance for the period an asset was held, so penalised long-term investors with inflationary gains and rewarded rapidly turned-over assets.
He added that overall, however, a more progressive way for HM Treasury to extract funds would be to introduce a wealth tax, which may even allow the government to reduce or simplify income taxes.
Tim Harvey, director at HR Independent, hoped CGT could be simplified as well as increased.
He said: “It does not raise enough money at the moment. The relative ease with which one can buy and sell holiday homes at a low rate is crying out for reform to stop high income earners creating capital gains instead of income.
“It could also do with simplification. We have to run CGT calculations on gains made every time we use an Isa.”
imogen.tew@ft.com
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