Capital gains tax (CGT) is levied on profits made from the sale of assets. CGT is paid by individuals, trusts and personal representatives of deceased persons; gains made by companies are subject to corporation tax. In our latest forecast, we expect CGT to raise £9.1 billion in 2019-20. That would represent 1.1 per cent of all receipts and is equivalent to around £300 per household and 0.4 per cent of national income.

The rate of CGT paid depends on the income of an individual and the type of asset being sold:

  • Basic rate income tax payers are typically subject to lower CGT rates: 10 per cent on gains from most assets and 18 per cent on residential property and ‘carried interest’ (performance-based rewards for investment managers). Primary residences (i.e. one’s main home) are exempt from CGT;
  • For trusts, and for individuals whose combined income and gains are above the higher rate income tax threshold, higher rates of CGT apply (20 per cent for most assets and 28 per cent on residential property and carried interest);
  • Sole traders and partners selling their business may qualify for the lower Entrepreneurs’ Relief rate of 10 per cent, up to a lifetime limit of £10 million;
  • Tax is only paid on gains above a threshold (the Annual Exempt Amount), which in 2019-20 is set at £12,000 for individuals and £6,000 for trusts.
  • Latest forecast

    Our latest fiscal forecast was published in March 2019. CGT receipts are set to rise as a share of GDP by 2023-24, due to expected growth in asset prices. Receipts are boosted temporarily in 2020-21, reflecting the Autumn Statement 2015 measure to reduce the payment window on capital gains arising from the sale of residential property (which was delayed by a year in the 2017 Autumn Budget). From April 2020, CGT on residential property sales will be payable 30 days after the sale of a property. The current payment window is between 10 and 22 months. In effect, this brings forward all future receipts, providing a one-off boost in 2020-21, which is neither repeated nor subsequently reversed.

    More detail on our latest forecast and how it was revised relative to our previous forecast in October 2018 was provided in paragraph 4.43 of our March 2019 EFO.

    Expand to read the extract from our March 2019 EFO

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  • Latest monthly data

    CGT receipts are received primarily in January as the tax is paid via self-assessment returns due on the last day of that month. Since some payments are typically received just after the deadline, some receipts score in February too. As returns are currently due 10 months after the end of the financial year, receipts are typically recorded in the financial year after an asset was sold generating the gain and accruing the tax liability.

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  • Forecast methodology

    Forecast process

    The OBR commissions forecasts of CGT receipts from HM Revenue and Customs (HMRC) for each fiscal event. We provide HMRC with economic forecasts that are used to generate the tax forecasts. These are scrutinised in a challenge process that typically involves two rounds of meetings where HMRC analysts present forecasts to the Budget Responsibility Committee and OBR staff. This process allows the BRC to refine the assumptions and judgements that underpin the forecasts before they are published in our Economic and fiscal outlooks.

    Forecasting models

    The CGT forecast is based on historical patterns in CGT accruals relating to financial and non-financial asset disposals. The forecast can be split into two parts: a base year estimate for the latest year where sufficient self-assessment data are available, and the medium-term forecast projecting the base year into the future using relevant economic determinants. Financial assets are projected forward using our equity price forecast, while residential assets are projected using our house price and property transactions forecasts.

    Main forecast determinants

    The main determinants of our CGT forecast are those related to the tax base, i.e. the financial and non-financial assets on which capital gains are realised. See the ready reckoners section below for more information on the effects of these determinants on CGT receipts.

    Main forecast judgements

    The main forecast judgements include:

    • The relationship between equity markets and disposals of listed shares – Our model uses an econometric relationship to relate equity prices to the value of CGT liabilities, but this relationship is historically volatile and therefore highly uncertain. We also look at the drivers of equity market performance to help understand whether listed share prices are likely to be a good predictor of future receipts.
    • The performance of unlisted shares – There is very limited data available on the value and disposals of unlisted shares. We use the performance of listed shares to proxy the value and volume of disposals in this sector, but may use judgement to move away from that simple relationship in cases where we do not consider the evolution of listed equity markets provide a good indicator.

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  • Previous forecasts

    CGT is strongly geared to changes in asset prices, and the number and timing of asset disposals, which have in the past been influenced by policy changes as well as market sentiment. CGT is also mostly paid in the financial year following an asset disposal, so there is no timely information on receipts. These factors mean that CGT receipts are particularly difficult to forecast. In line with this, our errors for CGT receipts have been relatively large, but in both directions.

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  • Policy measures

    Since our first forecast in June 2010, governments have announced 61 policy measures affecting our forecast for CGT. The original costings for these measures are contained in our policy measures database and were described briefly in the Treasury’s relevant Policy costings document. For measures announced since December 2014, the uncertainty ranking that we assigned to each is set out in a separate database. For those deemed ‘high’ or ‘very high’ uncertainty, the rationale for that ranking was set out in Annex A of the relevant Economic and fiscal outlook. These policy costings include:

    • an increase in the tax rate for high earners from 18 to 28 per cent was announced at the June 2010 Budget;
    • changes in the tax treatment of carried interest targeted at the preferential treatment of private equity and hedge fund managers were announced at the July 2015 Budget. The tax treatment of carried interest was modified again in the 2017 Autumn Budget;
    • changes to the payment window for disposals of residential property (from up to 22 months to 30 days) from 2019 onwards were announced at Autumn Statement 2015. This measure was delayed by a year in the 2017 Autumn Budget;
    • reductions in the rates for assets other than residential property and carried interest were announced at Budget 2016; and
    • restrictions to two ancillary reliefs within private residence relief (final period exemption and lettings relief) were announced at Budget 2018.

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  • Ready reckoners

    ‘Ready reckoners’ show how our fiscal forecasts could be affected by changes in selected economic determinants. They are stylised quantifications that reflect the typical impact of changes in economic variables on receipts and spending. These estimates are specific to our March 2017 forecast and we would expect them to become outdated over time, as the economy and public finances, and the policy setting, continue to evolve. They are subject to uncertainty because they are based on models that draw on historical relationships or simulations of policy settings. More information can be found in the ‘Tax and spending ready reckoners’ spreadsheet we published alongside our 2017 Fiscal risks report.

    The table below shows that:

    • CGT is very sensitive to changes in equity prices, as the tax is only due on the profit on sale of the asset, and not its overall value. So changes in equity prices influence both the value and likelihood of asset disposals; and
    • the value of turnover in the housing stock affects the value of assets subject to capital gains tax, but this has a much smaller effect.

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  • Other information

    Model review

    In our 2017 Forecast evaluation report we set out the initial conclusions of our review of fiscal forecasting models. This section sets out the conclusions of our review of the main capital gains tax model.

    Capital gains tax receipts are relatively volatile – this reflects the underlying volatility of asset sales and the extent to which they generate capital gains, overlaid by frequent and often material policy changes. Timely information about underlying liabilities is very limited, while the information that can be derived from tax returns is only available with a significant lag since the tax is paid via self-assessment and detailed analysis of the tax returns is not straightforward. The model relies on proxies to forecast changes in the tax base since the last year of self-assessment data. These proxies are relatively poor.

    The average absolute two-year ahead fiscal forecasting difference since our March 2012 forecast has been 15.0 per cent, which on a volatility-adjusted basis is higher than average across our fiscal forecasts. The average difference has been negative at 2.6 per cent, larger than average, with three of our March forecasts since 2012 over-predicting receipts at the two-year horizon.

    We agreed the following priorities with HMRC for development work in 2018:

    • Deeper analysis of tax return data (led by HMRC, as OBR staff do not have access to confidential taxpayer data) in order to understand the drivers of recent trends and explain differences from forecast.
    • Review the econometric equations used to forecast tax liabilities (drawing on insights from the analysis of tax returns).
    • Potentially develop a more disaggregated model in order to capture better the tax implications of divergent trends across different asset types.

    In our 2018 Forecast evaluation report, we provided an update on progress against the above priorities for work in 2018.

    • HMRC has produced a descriptive analysis of high-level trends in CGT receipts that highlighted the volatility of the underlying components of the forecast: the number of disposals, the average value of a disposal and the effective tax rate. We will use this work to help inform further development of the forecast model.
    • HMRC has carried out an initial refresh of the gearing coefficients assumed in the model. We plan to develop this work further over the coming year.
    • This work was de-prioritised during the year to devote more HMRC analytical resource to improving the operation and transparency of the modelling framework, which helped to inform our October 2018 EFO forecast. Over the coming year, we plan to review the model structure and aim to incorporate the insights we have taken from the time-series analysis of historical tax return data.

    We have agreed the following priorities with HMRC for further development work over the coming year in 2019:

    • Review the econometric equations used to forecast tax liabilities (drawing on insights from the analysis of tax returns and CGT survey data).
    • Review and improve the methodology used to forecast entreprenuers relief.
    • Develop a new analysis, linking CGT and SA datasets to gain a better understanding of the taxpaying population, including an analysis of income and disposal distributions.

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