The Office of Tax Simplification (OTS) recently released the
first report of the Capital Gains Tax (CGT) review.
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
The report suggests changes to the CGT regime that would bring it back to be similar to the regime in the 1990s.
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
- Looking at the chattels rules and amending the
- 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
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
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
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 takes on 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 extent 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 the 1990s, when CGT rates were aligned to IT rates and
indexation relief was available. 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
If you would like to discuss the report with us, or have any
concerns regarding your current capital assets, please get in touch with our tax team.
This update originally appeared on the website of our colleagues MHA Tait Walker.