In July, the Chancellor commissioned the Office of Tax Simplification (OTS) to carry out a review of Capital Gains Tax.
The OTS launched an extremely wide-ranging review and published a ‘call for evidence’ on technical detail and administration issues, though they did not seek views on the application to trusts or international aspects. The call for evidence closed on 9 November 2020. Just two days later, the OTS released their first response which seemed a surprisingly short turn-around! It is perhaps rather ominous that the time-frame was brought forward, though we do not expect a Budget before March 2021.
The first report concentrates on addressing perceived distortions in the tax system and deals with four interlinked areas. The first recommendation, that the government considers more closely aligning CGT rates with income tax rates, immediately grabbed the press headlines. But this was not proposed in isolation and the report makes some other quite significant suggestions.
Rates and boundaries
The OTS say the four headline rates of CGT at present create complexity; and the differential between these and the higher income tax rates distorts taxpayer behaviour. Distortion is particularly apparent at ‘boundary pressure points’ such as awards of employee shares which are taxed at much lower rates than cash remuneration. However, if there is closer alignment of CGT and income tax rates, the OTS say the government should reintroduce relief for inflation (they advocate indexation rather than taper relief); allow more flexible use of losses and consider interactions with the tax position of companies. If the two taxes are not aligned, the OTS recommend two rather than four rates of CGT, which do not depend on the level of the taxpayer’s income.
The OTS have examined the purpose of the exemption and if, as they believe, it is not an allowance but supposed to be a de minimis to take small gains out of taxation, the amount should be reduced. The current level (£12,300) seems too generous and, again, distorts taxpayer behaviour as there is a spike in annual gains realised just below this level. While it can easily be used on disposals from share portfolios, the cumulative benefit is lost on larger gains on one-off disposals of property, for example. The OTS acknowledge that any reduction could bring more taxpayers into CGT so should be accompanied by a broader exemption for personal effects. They also suggest administrative changes and a requirement for investment managers to report CGT information to ease compliance by taxpayers and HMRC.
‘Uplift’ on death
To an extent, the OTS have already made up their minds that this should go (at least for spouses and assets with relief from IHT) as it was one of their recommendations in their IHT review. Not surprisingly, they remain convinced that it distorts taxpayer behaviour (again) by encouraging people to hang on to assets until death. The other reason people may not give assets away earlier is that a lifetime gift triggers CGT, when there may be no other way to pay the tax. So the OTS say if the uplift goes, gift hold-over relief should be extended to all lifetime gifts and there should also be a general re-basing of assets to the year 2000. It is welcome news that the OTS agrees a 1982 base cost is far too long ago. Loss of the uplift will require better record-keeping and will be an additional area of administration for executors to manage. They may need two valuations, one at death for IHT and one in 2000 for CGT.
Business assets disposal relief
The government has already tightened this relief (and changed its name from entrepreneurs’ relief) and committed to a wider review. So it is not surprising that the OTS suggest it could be tightened further (to increase the minimum holding period to 10 years and the minimum shareholding to 25%). They recommend replacing the relief with one more closely focused on retirement, by reintroducing an age limit, perhaps linked to pension freedom age limits.
Once we have the second OTS paper, it seems likely that the government will give the proposals serious consideration but very difficult to predict what changes there will be and when they will be implemented.