In our article published in December 2020 (here) we reported on the bold recommendations for capital gains tax (CGT) reform made by the Office of Tax Simplification (OTS) in the first of its two reports. The first report considered the policy design and principles underpinning CGT. It caused alarm for many taxpayers and prompted concerning headlines, particularly a potential increase in CGT rates.
We anticipated the second report would also receive considerable attention, but this has not proved to be the case following its publication in May 2021. Whilst not headline-grabbing, it includes important recommendations that the Government may adopt in the fullness of time.
The second report is wide-ranging and explores the practical, technical and administrative issues of CGT. The OTS suggests a number of improvements that could be made in response to the evidence put forward by advisers, including this firm. The OTS also highlights a lack of public awareness and understanding of CGT and the need for HMRC to modernise its processes and guidance to enable taxpayers to meet their reporting and payment obligations.
The OTS makes 14 recommendations, including the following:
The OTS recommends a central hub for reporting and storing all CGT data. This would integrate the three main ways in which CGT can be reported currently into a new single customer account.
It also recommends that the reporting and payment deadline for a UK property tax return should be extended to 60 days from the current 30-day deadline. Estate agents or conveyancers should be mandated to inform their clients of the filing and payment requirements (or perhaps this should happen in addition). The extension to 60 days would be welcome and would allow sellers of UK land and property and their advisers more time to meet the compliance deadline.
Married couples and civil partners who live together can already transfer their assets between each other without triggering an immediate CGT charge. This treatment is also afforded to separating couples in the tax year of their separation. However, if a transfer is made in the next tax year, this transfer is treated as being at market value, and therefore a CGT charge may arise.
To demonstrate the potential unfairness of this rule, the OTS gives the (perhaps extreme) example that if a couple separate on 4 April 2022, they would only have until the following day, 5 April 2022, to transfer their assets to each other without triggering a CGT charge.
The OTS therefore suggests that the length of time separating couples can transfer assets between them is extended to the later of:
We raised this inadequate length of time in our response to the Call for Evidence, and therefore we welcome this recommendation. It would allow separating couples more time to negotiate their financial settlements and avoid the unfair outcomes that can arise depending on when they separated.
On the sale of a business, the sale proceeds may be calculated and received in several different ways. This may include them being agreed upfront but paid over a number of years, or a business could be sold for a sale price being dependent on future events (such as its future profitability).
The rules are complex (‘beyond even the most sophisticated non-professional taxpayers’ - OTS), as are the valuation methodologies required. In addition, the OTS acknowledges that the rules requiring payment of tax upfront can cause difficulties for taxpayers, due to the fact that in some cases the proceeds are not received until later (and in some cases, never).
The OTS therefore suggests that CGT should be charged on a ‘receipts’ basis, with tax being paid when the proceeds of sale are actually available or received. It stresses that the eligibility to existing reliefs should be preserved.
The implications of a ‘receipts’ basis would have to be considered carefully by the Exchequer, as the payment of the tax would be delayed and, potentially, there would be a reduction in the overall tax revenue.
At present, when a UK taxpayer buys or sells a foreign asset, their acquisition cost and the proceeds must be converted into sterling at the respective points in time they are incurred in order to calculate the gain on disposal.
A tax liability can therefore arise not only when the actual asset has increased in value between acquisition and sale, but also when there is a gain because of foreign currencies appreciating against sterling (or equally a taxable loss due to the weakening of sterling against the foreign currency).
Importantly, there is a specific CGT exemption for foreign exchange gains or losses that arise from movements of money in a foreign currency bank account. Without this exemption, a CGT liability could arise whenever funds are added or removed from a foreign currency bank account (as used to be the case).
The OTS acknowledges the complexities of calculating a CGT liability on foreign assets, and therefore for administrative ease recommends that the calculation of gains and losses is carried out in the relevant foreign currency, and then converted to sterling at the exchange rate on the date of disposal.
If adopted, this would significantly reduce the burden on taxpayers and their advisers. Under the current rules, the volume of work to calculate CGT on the disposal of foreign assets can be entirely disproportionate to the gain realised, and we therefore also welcome this recommendation.
Gains made on the disposal of a home which is used as the individual’s only or main residence throughout the period of ownership are exempt from CGT if certain conditions are met (such as the gardens/grounds not being greater than a certain permitted size). This relief is known as principal private residence relief (PPR relief).
If a homeowner who is resident in the UK owns more than one home, they can nominate which home is to be treated as their main home for the purposes of this relief. Nominations are optional, but must be made within two years of the date that the individual first had a particular combination of residences. If one home is later sold, and a new second home is purchased, the two-year period to make a nomination starts again. If there is no such nomination, PPR relief will apply to the home which is in fact used as the taxpayer’s ‘main residence’, based on a variety of factors.
The OTS recognises that those individuals who are aware of the nomination process will be able to assess the tax impact of which home should be considered their main residence. However, the OTS considers that there is limited awareness of the nomination rules in the first place, causing a disparity between taxpayers who have professional advisers (and so are more informed of the rules and allowances), and those who do not.
The OTS recommends that the Government takes steps to raise awareness of a person’s ability to nominate which of their homes is treated as the main home for the purpose of this relief. One method of doing this is for estate agents and conveyancers to distribute the information to purchasers of a new home. The OTS also includes the recommendation that the nomination is captured through the new single customer account.
Many of the OTS recommendations are welcome. They are merely suggestions at this stage and it remains to be seen whether the Government will act upon any of them.
If you need advice relating to CGT or other areas of concern, please do not hesitate to get in touch with a member of our private client team.