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What next for capital gains tax? The Office of Tax Simplification makes bold recommendations

Posted: 01/12/2020

Alarm bells will be ringing for many taxpayers and their advisers following the report published by the Office of Tax Simplification (OTS) on 11 November 2020.

Its recommendations, which are made independently to the Government, have the potential to increase capital gains tax (CGT) revenues by billions of pounds and could aid the Government in funding its response to the current pandemic. There is also a counter argument that a reduction in rates, whether temporary or permanent, could assist by providing an economic stimulus.

There is real concern that the proposed changes, if brought into law, could lead to significant tax increases, both in terms of headline rates and also in terms of reliefs available. This may result in changes to investment behaviour as well as changes to the structuring of family businesses and in wealth planning generally.

Tax rates set to increase?

The OTS has suggested that:

  • CGT rates should be more closely aligned with the higher rates of income tax so that the tax system is more ‘neutral’. The report anticipates that doing this could result in an additional £14 billion of tax revenue per year. This assumes that taxpayers carry on as before and that no other changes are made to soften the effect that the increased rates would have; and
  • the annual exempt amount (AEA) be reduced from £12,300 to £5,000. This would bring more individuals within the CGT tax net but could also deter affected taxpayers from realising similar levels of gain. In order to make tax compliance easier for affected taxpayers, the OTS has recommended that investment managers be required to report CGT information to taxpayers and to HMRC.

As a concession, the OTS has suggested that a form of relief for inflationary gains could be introduced, reminiscent of the days when indexation relief and taper relief were available. If this were to happen, the £14 billion figure quoted above would not be achieved. It would also make calculating chargeable gains a more complicated exercise than is currently the case.

One rationale for these changes is that the OTS believes that the current rate disparity can distort business and family decision-making, and create an incentive for taxpayers to structure their affairs in ways that allow them to characterise income as capital gains.

Interaction with inheritance tax (IHT)

In support of an idea that has already been mooted by the OTS as part of its IHT review in July 2019, this first report into CGT suggests that taxpayers should no longer be able to benefit from both an IHT exemption (for example, on assets passing to a surviving spouse on death or on certain business assets) and an automatic uplift in the value of an asset upon death (the CGT uplift). The OTS then goes even further and recommends that the Government should consider removing the CGT uplift altogether.

If this were to happen, the recipient would acquire the asset at the historic base cost of the person who has passed away.

By way of concessions, the OTS proposes:

  • a general rebasing exercise, with all assets owned pre-2000 rebased to their 2000 values; and
  • an extension of gift holdover relief to non-business assets.

Business assets

There is a policy judgement for the Government to make about the extent to which CGT reliefs should be used to stimulate business investment and risk taking.

Only nine months ago, the lifetime limit for business asset disposal relief (formerly entrepreneurs’ relief) was reduced from £10 million to £1 million. The OTS now recommends removing this relief altogether and replacing it with one more focused on retirement. Also alarmingly, it simply says investors’ relief should be abolished.

What next?

This is the first report from the OTS as part of a two-stage review of the UK’s CGT regime. A second report, which is expected in early 2021, will explore technical and administrative issues in greater detail once the OTS has considered the responses to its second call for evidence. Given the content of the first report, the second report is likely to receive a lot of attention. 

The Chancellor did not refer to tax changes explicitly in his spending review statement on 25 November, although clearly he must replenish the Government’s coffers. It is therefore far from certain which, if any, of the OTS recommendations will form Government policy. Like past chancellors, Rishi Sunak could distance himself from the report if he wishes to; CGT is a small piece of the tax jigsaw puzzle, after all.  

With a budget expected in March 2021, it is possible that rates will increase from this point or from 6 April 2021. There was a chance of this even before the OTS issued its report, as there has been speculation about rate increases for several years. The speculation alone is likely to prompt taxpayers to make disposals before the budget and this could be a bumper year for CGT receipts as a result. It remains to be seen if this will drive receipts down in the longer-term.  

In the short term, taxpayers can expect moderate CGT increases, with proposals for more radical reform being parked at least until Government time allows.

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