Capital Gains Tax Review – Forward to the past
The Office of Tax Simplification (OTS) recently released the first report of the Capital Gains Tax (CGT) review.
Our previous blog looked at what may change in the current CGT regime and the recent report from the OTS has offered no real surprises. The Chancellor asked the OTS to ‘identify opportunities relating to administrative and technical issues as well as areas where the present rules can distort behaviour or do not meet their policy intent’. The report details areas in which CGT is counter intuitive and creates odd incentives. The report draws on a range of economic perspectives with almost 100 written responses and analysis of taxpayer data. There will be a second report early next year which will explore key technical and administrative issues.
The report suggests changes to the CGT regime that would bring it back to be similar to the regime in 1998.
Rates and boundaries
It is believed the disparity in rates between CGT and Income Tax (IT) can distort business and family decision making and creates an incentive for taxpayers to arrange their affairs in ways that effectively re-characterise income as capital gains.
Possible amendments suggested by the OTS are:
- Align IT and CGT rates. Income tax rates in the UK (not Scotland) are 20%, 40% and 45% with CGT rates being 10%, 18%, 20% and 28% depending on the asset sold and the individuals income levels i.e. if an individual disposes of listed shares in an investment portfolio and pays higher rates of IT, they will pay CGT at a rate of 20% on the gain made on sale. The change could mean the individual will pay CGT at 40% instead of 20%
- Ensure CGT can be calculated without the need for knowing taxable income
- Possible relief for inflationary gains, meaning an indexation allowance would apply
- Making owner managed business owners rewards for employment duties more consistent
Annual exempt amount
The OTS have said that the relatively high level of the Annual Exempt Amount can distort investment decisions. In the tax year 2017-18, around 50,000 people reported net gains just below the threshold. If the government’s policy is that the Annual Exempt Amount is intended mainly to operate as an administrative de minimis, it should consider reducing the level.
Possible amendments suggested are:
- Reducing the Annual Exempt Amount to an admin de minimis
- Looking at the chattels rules and amending the limits
- Formalising the administration of real time gain reporting and aligning it with the Personal Tax Account
- Introducing a requirement for fund managers to report capital gains direct to taxpayers and HMRC directly, to make compliance easier
Interaction with lifetime gifts and Inheritance Tax (IHT)
CGT incentivises owners to transfer business and personal assets to others on death rather than during their lifetime. This may not be best for business, the individuals or families involved, or to the wider economy.
The OTS’s second IHT report recommended that where a relief or exemption from IHT applies, the government should consider removing the capital gains uplift on death, and instead provide that the recipient is treated as acquiring the asset at the original base cost. This would not affect taxpayers who retain assets, but would affect those who sell recently inherited assets.
The suggested amendments are:
- As mentioned above, an option to remove the uplift value on an assets received on death to instead ensure the recipient take son the original base costs of the asset. Currently, the base cost acquired is the probate value.
- Widening the gift hold over conditions to make the relief apply to more assets. Currently, gift hold over is only allowable on qualifying business assets and shares.
- Rebasing asset values to a more recent year. Currently, if an asset was acquired after March 1982 the base cost is the initial value at acquisition. If the asset was acquired prior to March 1982 the value is rebased to the March 1982 value, meaning only the uplift in value since that date was chargeable to CGT. An option would be to rebase asset values to a date more recent than March 1982, to say ten years ago.
There is a policy judgement for government to make about the extend to which CGT reliefs should be used to seek to stimulate business investment and risk taking.
Possible changes could be:
- Changing Business Asset Disposal Relief (formerly Entrepreneurs Relief) to focus more on business owners retiring, possibly introducing a holding requirement period of longer than the current 24 months. A suggestion of ten years is made.
- Abolish Investors Relief (relief for selling unlisted shares in a trading company that you are not connected to).
The initial report suggests a reform of the CGT regime to similar to how it was in 1998, where CGT rates were aligned to IT rates. The suggestions are very much that, suggestions, and we don’t expect every area to be affected, but this will become clearer when the second report is released early next year.
Some proposed changes imply that the administrative burden may be less, but some taxpayers would also suffer less CGT for example if gift relief is widened to non business gifts.
A small change of simply reducing the Annual Exempt Amount could mean hundreds of thousands of additional tax returns being filed each year, which may not result in a lot of tax but may have an administrative burden on HMRC
It would be sensible to assume business owners will be targeted to make business relief conditions tighter e.g. being based more on retirement, and the IT and CGT rates to be aligned.
The 2020 pandemic has had a huge impact on the economy and finances and we all know the government will seek to recoup as much additional taxes as they feasibly can, whilst considering the impact on business and entrepreneurial risk taking.
What should you do
As ever, nothing is certain, but if you are considering selling an asset, gifting a business asset, making a gift to a trust or carrying out IHT planning in the near future, it may be worth completing transactions sooner rather than later.
We would hope that changes to the regime will be clear, with advance notice, to give taxpayers and our clients time to consider how it impacts them and to make decisions in advance, but this is not clear at the moment.
If you would like to discuss the report with us, or have any concerns regarding your current capital assets, we have a large team of qualified tax advisors who will be available to help.