The Office of Tax Simplification (OTS) has published its first report as part of the capital gains tax review undertaken at the chancellor’s request to ‘identify opportunities relating to administrative and technical issues as well as areas where the present rules can distort behaviour or do not meet their policy intent’.
The report recommends the following 11 simplifications, to smooth out distortions, improve administrative efficiency and make the tax easier to understand and predict, across four areas.
1. Rates and boundaries:
Consideration should be given to more closely aligning CGT rates with income tax rates, and the boundaries between the two taxes should be analysed (particularly looking at the interaction of taxes in relation to share-based remuneration and the accumulation of retained earnings in smaller owner-managed companies).
If the rates are to be more closely aligned, the government should consider reintroducing a form of relief for inflationary gains, address any interactions with the tax position of companies, and consider allowing a more flexible use of capital losses.
If there remains a disparity between CGT and income tax rates, and the government wishes to make tax liabilities easier to understand and predict, it should consider reducing the number of CGT rates and the extent to which liabilities depend on the level of a taxpayer’s income.
In relation to CGT/IT boundary issues, the government should look closely at whether employees and owner managers are treated consistently in terms of remuneration from personal labour, and should consider taxing share-based rewards arising from employment and accumulated retained earnings in smaller companies at income tax rates.
2. Annual exempt amount:
If the intention is to operate the AEA as an administrative de minimis, the government should consider reducing its level.
Any reduction should be considered together with reform of the chattels exemption (introducing a broader exemption for personal effects), formalising the real-time CGT service (linking returns up with the personal tax account), and potentially requiring investment managers to report CGT information to taxpayers and HMRC to make compliance easier for individuals.
3. Interaction with lifetime gifts and inheritance tax:
Where an IHT exemption or relief applies, the government should consider removing the CGT uplift on death, and treat the recipient as acquiring the asset at the historic base cost of the person who has died.
Consideration should be given to applying the above principle more widely (replacing capital gains uplift on death with base cost).
If the capital gains uplift were to be removed more widely, the government should also consider a rebasing of all assets (the OTS suggests to the year 2000) and extending gift holdover to a broader range of assets.
4. Business reliefs:
The OTS suggests the Government should consider replacing business asset disposal relief (formerly entrepreneurs’ relief) with a relief more focused on retirement; and abolish investors’ relief.
This is the first of two reports on CGT by the OTS. The second will follow in early 2021 and will focus on technical and administrative issues.
Comment on the report, Rebecca Durrant, partner at Crowe UK, observed: ‘CGT brought in £8.3bn in 2017/18 compared to income tax, which brought in £180bn – a comparatively low contribution to the tax take. Increasing tax rates does not necessarily mean increased revenue. CGT is, in reality, a voluntary tax, as the timing of any sale is at the owner’s discretion. If CGT rates were to rise, history shows us that people tend to hang on to their assets.
‘A restriction to tax reliefs on assets that are sold more frequently, such as private property, is an area where significant revenue could be made, given that private residence relief accounts for around £26.7bn a year. However, this is not likely to be popular with the voting public,’ Durrant said. ‘It may make more sense to target abuse of the rules. For example, where property developers claim relief on consecutive properties.’
‘The anomalies between inheritance tax and CGT do need to be resolved, as this distorts behaviour, creates complexity and can ultimately mean some assets fall out of charge completely. Scrapping the CGT uplift on death would go some way towards this and would ensure much-needed simplicity and fairness.
‘We do, however, need to protect our entrepreneurial community,’ Durrant added. ‘The OTS seems to be keen to protect business owners on their retirement, which is positive news. However, there is a difference between earned income and capital gains realised through enterprise. Business owners and investors are often taking huge risks with their own capital. Therefore, these gains should continue to be differentiated from inherited wealth or capital growth on passive investments and rewarded with lower tax rates.’
The Office of Tax Simplification (OTS) has published its first report as part of the capital gains tax review undertaken at the chancellor’s request to ‘identify opportunities relating to administrative and technical issues as well as areas where the present rules can distort behaviour or do not meet their policy intent’.
The report recommends the following 11 simplifications, to smooth out distortions, improve administrative efficiency and make the tax easier to understand and predict, across four areas.
1. Rates and boundaries:
Consideration should be given to more closely aligning CGT rates with income tax rates, and the boundaries between the two taxes should be analysed (particularly looking at the interaction of taxes in relation to share-based remuneration and the accumulation of retained earnings in smaller owner-managed companies).
If the rates are to be more closely aligned, the government should consider reintroducing a form of relief for inflationary gains, address any interactions with the tax position of companies, and consider allowing a more flexible use of capital losses.
If there remains a disparity between CGT and income tax rates, and the government wishes to make tax liabilities easier to understand and predict, it should consider reducing the number of CGT rates and the extent to which liabilities depend on the level of a taxpayer’s income.
In relation to CGT/IT boundary issues, the government should look closely at whether employees and owner managers are treated consistently in terms of remuneration from personal labour, and should consider taxing share-based rewards arising from employment and accumulated retained earnings in smaller companies at income tax rates.
2. Annual exempt amount:
If the intention is to operate the AEA as an administrative de minimis, the government should consider reducing its level.
Any reduction should be considered together with reform of the chattels exemption (introducing a broader exemption for personal effects), formalising the real-time CGT service (linking returns up with the personal tax account), and potentially requiring investment managers to report CGT information to taxpayers and HMRC to make compliance easier for individuals.
3. Interaction with lifetime gifts and inheritance tax:
Where an IHT exemption or relief applies, the government should consider removing the CGT uplift on death, and treat the recipient as acquiring the asset at the historic base cost of the person who has died.
Consideration should be given to applying the above principle more widely (replacing capital gains uplift on death with base cost).
If the capital gains uplift were to be removed more widely, the government should also consider a rebasing of all assets (the OTS suggests to the year 2000) and extending gift holdover to a broader range of assets.
4. Business reliefs:
The OTS suggests the Government should consider replacing business asset disposal relief (formerly entrepreneurs’ relief) with a relief more focused on retirement; and abolish investors’ relief.
This is the first of two reports on CGT by the OTS. The second will follow in early 2021 and will focus on technical and administrative issues.
Comment on the report, Rebecca Durrant, partner at Crowe UK, observed: ‘CGT brought in £8.3bn in 2017/18 compared to income tax, which brought in £180bn – a comparatively low contribution to the tax take. Increasing tax rates does not necessarily mean increased revenue. CGT is, in reality, a voluntary tax, as the timing of any sale is at the owner’s discretion. If CGT rates were to rise, history shows us that people tend to hang on to their assets.
‘A restriction to tax reliefs on assets that are sold more frequently, such as private property, is an area where significant revenue could be made, given that private residence relief accounts for around £26.7bn a year. However, this is not likely to be popular with the voting public,’ Durrant said. ‘It may make more sense to target abuse of the rules. For example, where property developers claim relief on consecutive properties.’
‘The anomalies between inheritance tax and CGT do need to be resolved, as this distorts behaviour, creates complexity and can ultimately mean some assets fall out of charge completely. Scrapping the CGT uplift on death would go some way towards this and would ensure much-needed simplicity and fairness.
‘We do, however, need to protect our entrepreneurial community,’ Durrant added. ‘The OTS seems to be keen to protect business owners on their retirement, which is positive news. However, there is a difference between earned income and capital gains realised through enterprise. Business owners and investors are often taking huge risks with their own capital. Therefore, these gains should continue to be differentiated from inherited wealth or capital growth on passive investments and rewarded with lower tax rates.’
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