Office of Tax Simplification Review of Capital Gains Tax

The Office for Tax Simplification (OTS) published its first of two reports on the possible simplification of Capital Gains Tax (CGT) in November 2020. This first report looks at broad policy issues and the second report, due early 2021, will look at more technical issues.

Of course, the report is only a series of recommendations which the Government might like to consider. The Chancellor has no obligation to follow any of them and indeed may choose to do something completely different. However, for anyone planning significant capital disposal, it could be useful to understand how the report could influence future CGT changes.

The OTS considers four areas of policy and make a number of recommendations in its review of capital gains tax.

1.Rates and boundaries

The report concludes that it would be simpler to have fewer CGT rates and to de-couple the tax from income tax. At present CGT could be payable at anything from 10% to 28% depending on the type of assets and other income of the individual. It also observes that CGT rates are generally lower than income tax rates which leads to some taxpayer choices designed to convert income to capital. The alignment of the CGT and income tax rates would reduce this incentive. In particular, it mentions share-based remuneration and accumulation of earnings in SME companies as examples of the inconsistency of the tax treatment of the employee or owner-managers reward for effort, as compared with a return on investment.

If the Government were to makes changes in this area the Report also suggests that consideration be given to the effect of inflation and more flexibility in the use of capital losses.

2. Annual Exempt Amount

This is currently £12,300 and is the number of gains an individual may make before paying tax. Whilst the report recognises the need for an administrative deminimis level it suggests that this exemption is too high and could be reduced to maybe £5,000 p.a. Coupled with this it suggests that improvements in reporting through the Real-Time CGT tool and reporting requirements placed on investment managers would reduce the compliance burden.

3 Capital transfers

The interaction between CGT and Inheritance Tax can lead to neither tax being payable, or both, in relation to the same transaction. The report suggests removing the CGT free uplift on death under which those inheriting acquire assets at their probate value, where a business relief removes the Inheritance Tax charge. Coupled with this is a suggestion to re-base CGT to the market value of assets in the year 2000, effectively wiping out any gains accruing before this date, (this was last done in 1982), together with an extension of the gift holdover relief by which assets are passed on at their base cost on gift rather than market value.

4. Business Reliefs

Business Asset Disposal Relief (previously called Entrepreneur’s Relief) has been much debated lately and is considered in this report. Suggestions include increasing the minimum holding in a business from 5% to 25%, lengthening the holding period to 10 years, and linking the relief with retirement. This would recognise that, for many small businesses, the value accumulated in a business is in effect a long-term saving for retirement.

It also recommends abolishing the little-used investor relief which was introduced in 2016.

A copy of the full report on the review of capital gains tax is available on the Office of Tax Simplification website, https://www.gov.uk/government/organisations/office-of-tax-simplification