The Office of Tax Simplification (OTS) has conducted an extensive review of capital gains tax and has now published its findings and recommendations.
The OTS is an independent adviser to the Government on the UK tax system; its role to offer recommendations and advice on making the UK tax system simpler.
In July 2020 the Chancellor requested this review of CGT to be carried out. He 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 OTS report focuses on four areas and makes a number of recommendations including the following.
Rates and boundaries
- The Government should consider more closely aligning the rates of capital gains tax with income tax.
- If the Government does more closely align the rates of capital gains tax with income tax, then it should also consider (i) reintroducing a form of relief for inflation, (ii) the interaction of personal tax outcomes with that of companies, and (iii) allow more flexible use of capital losses.
- If a disparity between capital gains tax and income tax rates remains, The Government should consider simplifying matters by reducing the number of different capital gains tax rates and the extent to which liabilities depend on the level of taxpayers income.
- If the Government considers boundary issues then it should look at whether employees and business owners rewards form personal labour (as distinct from capital investment) are treated consistently, and in particular whether (i) share based employment rewards ought to be taxed differently and (ii) accumulated retained earnings in small businesses should always be subjected to income tax rates.
The Annual Exempt Amount
- If the annual exempt amount is intended to operate as a de minimis for administrative simplicity, then it should be reduced to a lower level than it is currently.
- The Government should improve administration, such as by implementing a full real time capital gains tax reporting service, linking this to the personal account, and explore requiring investment managers and others to report capital gains tax information to taxpayers and HMRC.
Capital transfers and interaction with inheritance tax
- Generally, and in particular where a relief (such as business or agricultural relief) or exemption from inheritance tax applies, the Government should consider removing the automatic capital gains tax uplift on death; instead the person inheriting the asset(s) would inherit the historic capital gains tax base cost from the person who has died.
- If the Government does remove the capital gains tax uplift on death more widely, it should look at the rebasing of all assets (the year 2000 suggested) and whether gift holdover relief should be extended to a broader range of assets.
- The Government should consider replacing business asset disposal relief (formerly entrepreneurs’ relief) with a relief more focused on retirement.
- The Government should abolish investors’ relief.
It is important to remember that the OTS is an advisory body to the Government, it is for Government to make policy decisions and change tax law. That said the OTS recommendations will receive a lot of Government attention and it is likely that if the Government does decide to make changes in due course, some of these recommendations from the OTS will feature.
Some of the recommendations are relatively simple to introduce and the purpose of the changes is clear.
Others are more complex. In particular, those changes that interact with inheritance tax (which has also been the subject of OTS work recently) could fundamentally change behaviours of taxpayers; such as when a family business is handed on to the next generation, or how wealth is distributed during lifetime. With regards business reliefs, the Government will need to carefully consider the extent to which it wants capital gains tax rules to motivate and encourage entrepreneurs’ to take risk and generate wealth – in a post Covid-19 world there is an important economic balance to be struck between the importance of wealth creation vs. increased taxation.
If you would like to discuss your personal tax affairs in light of potential future capital gains tax and/or inheritance tax changes please contact our Private Client team on 01788 539000.