The Office of Tax Simplification (OTS) published their Capital Gains Tax (CGT) review this week (11 November 2020) which concluded that many of the current rules were counter-intuitive. Key recommendations in the report included aligning CGT and income tax rates, a reduction in the annual exempt amount, overhauling entrepreneurs’ relief (again) and a removal of the base cost uplift when transferring assets ‘on death’, rather than during lifetime.
Given the wide scope of the review, the OTS will publish a further report in early 2021 on the technical and administrative aspects of CGT.
The OTS is an independent adviser to the government and provides recommendations on simplifying the UK tax system. The OTS does not implement the changes recommended, it is a matter for government and parliament. This particular review was requested by the Chancellor, Rishi Sunak, in July.
Currently the top rate of CGT is 20% (or 28% for residential property and ‘carry interest’), which compares favourably with the top rate of income tax of 45%. Aligning the two rates could raise up to £14 billion for the Exchequer, according to figures provided by HM Revenue & Customs, though the OTS admitted that the amount raised would likely be lower as taxpayers could simply change their behaviour, e.g. by simply holding on to assets instead of selling them. The OTS mentioned that the government should consider reintroducing ‘indexation’ to minimise the effects of inflation.
The report also suggested taxing share-based remuneration arrangements and accumulated retained earnings in owner-managed companies (which are then liquidated) at income tax rates. Both of these areas are already subject to complex stand-alone taxation regimes or anti-avoidance legislation specifically targeted at arrangements designed to create a tax advantage. The benefit of further legislation in this area seems unwise given the lack of certainty that already exists.
The OTS also found that the annual allowance amount (the £12,300 threshold for gains before CGT is charged) was distorting investment decisions and was too high to serve as an administrative de minimus, as large numbers of individuals report gains just below the threshold each tax year. Most financial advisors will work with their clients to maximise the use of this relief and so it is no surprise to see this trend, and it remains a legitimate part of any properly advised individuals’ overall tax strategy. The report suggested that the government should consider reducing the annual exempt amount and widening the current exemptions for chattels (broadly personal possessions). In effect, this type of change would simply represent an increase in tax, as a change to any chattel exemptions is unlikely to make any substantial difference for the vast majority of taxpayers.
Other recommendations included reforming entrepreneurs’ relief (recently renamed as ‘business asset disposal relief’) so that the focus was solely on retiring business owners, perhaps with an age limit and longer ownership period required. We would note that ‘retirement relief’ existed previously and was removed from April 1999 (subject to some transitory provisions) and replaced by business asset taper relief.
The report also suggested that where a relief or exemption from inheritance tax applies, the capital gains uplift on assets transferred on death should be removed, and instead the recipient should be treated as acquiring the assets at the historic base cost of the person who has died. The current rules allow beneficiaries to inherit an asset at market value on the date of probate rather than its original purchase price, so if the asset is sold shortly after inheriting it there would, in most cases, be no CGT to pay. Many families’ IHT mitigation strategies rely on this and so reviews of existing Will arrangements will be necessary if this is introduced. This is a major change to the current regime and cannot be overlooked.
Sean Bannister: “If the suggestions contained in the OTS’s report are implemented this would represent a major overhaul of the CGT regime. This could impact landlords, those with large share portfolios and business owners in particular.
I am somewhat disappointed that restrictions to the CGT relief available to entrepreneurs have been proposed. These individuals create wealth and employment opportunities in the UK. It also seems too soon given that entrepreneurs’ relief was overhauled (and renamed) earlier this year.
However the reforms contained in the OTS’s report are only recommendations for the government and previous recommendations from the OTS on the inheritance tax reforms have not been adopted. That said, the Chancellor’s next Budget (expected in early 2021) will certainly be interesting…”.
If you would like to discuss any of the issues raised in this update, please contact Sean Bannister, or any member of the Tax team. We will continue to monitor the situation and report further in due course.
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Please note that this blog is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content of this blog.
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