The Office of Tax Simplification (OTS) has published 'Simplifying by Design', the first report of its current Capital Gains Tax (CGT) review. It recommends some major changes to CGT including increasing tax rates and removing business asset reliefs.
The report makes eleven recommendations, many of which do not appear to simplify CGT, although they may appeal to the Chancellor, Rishi Sunak, as methods for raising tax revenue.
They include ideas to:
- More closely align CGT rates with Income Tax (IT) rates.
- Reintroduce an indexation allowance.
- Reassess share scheme taxation particularly for small business.
- Remove some CGT reliefs for owner-managed business.
- End CGT re-basing on death but to introduce re-basing to 2000.
- Scrap Business Asset Relief and Investor Relief.
- Reintroduce a retirement relief.
First reactions from the leading tax and accountancy bodies to the OTS' review indicate little appetite for any major reform to CGT.
The Institute of Chartered Accountants in England and Wales’s (ICAEW) comments that there is no need to overhaul CGT, “the scope and boundary of CGT is generally clear” and that system “largely achieves” its policy intent of discouraging schemes that seek to convert income into a capital gain for tax purposes.
It highlights that the new system of 30-day reporting and payment of CGT on residential properties is “very problematic”. Concluding that: “There needs to be a strategic look at the reporting and payment of CGT and whether it should sit alongside income tax self-assessment or be completely separate. At the moment we have a confusing mix.”
The Chartered Institute of Taxation's (CIOT) Tax Policy Director, John Cullinane, said: “Today’s OTS report is a welcome step in exploring how capital gains tax distorts taxpayers’ behaviour, and its recommendations provide a useful framework for the Government to take the issues forward."
Noting that there are also interactions with the taxation of companies and trusts which need to be worked through, he says, "A diet of piecemeal Budget surprises would be unlikely to lead to a more coherent system or to achieve the best balance between these factors."
The OTS's recommendations
Rates & boundaries
Recommendation 1
If the government considers the simplification priority is to reduce distortions to behaviour, it should either:
- consider more closely aligning Capital Gains Tax rates with Income Tax rates, or
- consider addressing boundary issues as between Capital Gains Tax and Income Tax
Recommendation 2
If the government considers more closely aligning Capital Gains Tax and Income Tax rates it should also:
- Consider reintroducing a form of relief for inflationary gains.
- Consider the interactions with the tax position of companies.
- Consider allowing a more flexible use of capital losses.
Recommendation 3
If there remains a disparity between Capital Gains Tax rates and Income Tax rates and the government wishes to make Tax liabilities easier to understand and predict, it should consider reducing the number of Capital Gains Tax rates and the extent to which liabilities depend on the level of a taxpayer’s income.
Recommendation 4
If the government considers addressing Capital Gains Tax and Income Tax boundary issues, it should:
- consider whether employees and owner-managers’ rewards from personal labour (as distinct from capital investment) are treated consistently and, in particular
- consider taxing more of the share-based rewards arising from employment and of the accumulated retained earnings in smaller companies, at Income Tax rates.
Annual Exempt Amount
Recommendation 5
If the government’s policy is that the Annual Exempt Amount is intended mainly to operate as an administrative de minimis, it should consider reducing its level.
Recommendation 6
If the government does reduce the Annual Exempt Amount, it should do so in conjunction with:
- Considering reforming the current chattels exemption by introducing a broader exemption for personal effects, with only specific categories of assets being taxable.
- Formalising the administrative arrangements for the real-time capital gains service and linking up these returns to the Personal Tax Account.
- Exploring requiring investment managers and others to report Capital Gains Tax information to taxpayers and HMRC, to make tax compliance easier for individuals.
Capital Transfers
Recommendation 7
Where a Relief or Exemption from Inheritance Tax applies, the government should consider removing the capital gains uplift on death and instead provide that the recipient is treated as acquiring the assets at the historic base cost of the person who has died.
Recommendation 8
In addition, the government should consider removing the capital gains uplift on death more widely, and instead provide that the person inheriting the asset is treated as acquiring the assets at the historic base cost of the person who has died.
Recommendation 9
If the government does remove the capital gains uplift on death more widely, it should:
- Consider a rebasing of all assets, perhaps to the year 2000.
- Consider extending Gift Holdover Relief to a broader range of assets.
Business reliefs
Recommendation 10
The government should consider replacing Business Asset Disposal Relief with a relief more focused on retirement.
Recommendation 11
The government should abolish Investors’ Relief.
The report only focused on individuals’ liabilities and does not cover CGT for trusts or the attribution of offshore gains to UK resident individuals. Neither does it explore CGT in the years of an individual’s arrival or departure from the UK.
As this review focuses on policy design and principles underpinning the tax, a second report will follow next year and will explore key technical and administrative issues.
Useful guides on this topic
Capital Gains Tax zone
Our guides to CGT including detailed guides to Business Asset Disposal Relief and other business asset reliefs, such as hold-over relief, guides to Private Residence Relief, and losses. Each guide is maintained and updated for new case law and legislation in real-time.
Inheritance Tax zone
Our guides cover all the key aspects of IHT
External links
OTS Capital Gains Tax review – first report: Simplifying by design
ICAEW: No need to overhaul CGT
CIOT: CIOT welcomes capital gains tax report but warns against piecemeal approach