Following the Chancellor of the Exchequer’s request to the Office of Tax Simplification (OTS) to review our current system for Capital Gains Tax (CGT), the OTS have since released the first of two reports, detailing the principles underpinning CGT and some recommendations for its reform.
CGT is one area where the Government’s hands are not (theoretically) tied by a manifesto pledge to hold tax rates. It is also a part of the tax system which has been subject to regular regime changes.
While increasing government revenues is outside the OTS’s remit, due to the increased levels of support the Government has provided to help see the economy through the pandemic, alongside the speed at which the report was pushed through, some commentators believe the report is a precursor for change to assist in boosting the treasury’s diminishing reserves.
Below is an overview of the four key areas the OTS has suggested the Government take into consideration.
One option is to realign CGT rates with those of Income Tax (IT) as they were back in 1998. This would also likely require reintroducing some form of indexation allowance, which adjusts the growth in gains to account for general inflation.
On paper, this change could raise some £14billion a year for the Exchequer however, in practice, the amount is likely to be less, as those affected may opt to take advice and delay the disposals of assets.
If the rates are aligned, the OTS also sees a case for considering a more flexible use of capital losses as well as reducing the need for complex rules to police the boundary between income and gains.
If no alignment is made, recommendations are to reduce the number of rates and the extent to which liabilities depend on the level of a taxpayer’s income to make CGT liabilities easier to understand. The boundaries between CGT and IT would also need to be reviewed, in particular with relation to whether employee’s and owner-managers’ rewards from personal labour are treated consistently and whether to tax more of the share-based rewards arising from employment and more of the accumulated retained earnings in smaller businesses at IT rates.
In 2017/2018, around 50,000 people reported gains close to the threshold, which leads the OTS to believe that the threshold is being used as standard practice and is influencing investment decisions.
The recommendation is to reduce the amount to something so small it does not bear consideration when it comes to tax planning. For example, if reduced to £6,000, some 235,000 more people would be liable to CGT raising £480million in the first year. A reduction to £2,500 would affect 360,000 more people, generating additional review of £835million in the first year. Based on the data in the OTS report, the figure could lie somewhere between £2,000 and £4,000.
If the annual exempt amount is reduced, the government should also:
Where Inheritance Tax (IHT) exemptions or relief applies, the OTS have historically recommended that the capital gains uplift on death should be removed. They are now suggesting that this should be expanded to include circumstances where IHT is payable too. Instead, they provide that the recipient is treated as acquiring the assets at the historic base cost of the person who has died. The reason behind this is that the OTS believes the way IHT and CGT interact is illogical.
For example, an individual can pass shares that have increased in value to their spouse on a no gain no loss basis. Should the recipient spouse then pass away, and the shares be inherited by the original spouse, there is no IHT due as the spousal exemption and the gains on the share portfolio are wiped out with no CGT implications.
Gifting assets can also attract CGT, which the OTS understands can impede intergenerational transfers. So, if the capital gains uplift on death were to be scrapped, the OTS recommends an extension of Gift Holdover Relief to a broader range of assets and the potential rebasing of assets to the year 2000 to assist with the administrative challenge in calculating historic base costs.
Here the recommendation is to replace Business Asset Disposal Relief (BADR) with something more focused on retirement. While the OTS realises an ongoing need for CGT relief in relation to retiring business owners, particularly those who founded or scaled up their busines, BADR is currently broader than this so could be readdressed. Options include:
Another option is to scrap Investors Relief – although only 5 years old, it is reported that take-up has been minimal (only 5% of those interviewed would consider using it) and therefore the OTS feels it is not having its intended effect and should be abolished.
With the economic costs of the pandemic inevitably needing to be paid back, CGT was always a potential target. And while we have no certainty that any of the above recommendations will be implemented by the government, now could be a wise time to review any assets you hold that may be liable to CGT with your adviser and decide what, if any, action is required.
If you would like to discuss your options ahead of your next annual review, please contact us here.
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