Last week, the Office of Tax Simplification published the second volume of its recommendations for the reform of capital gains tax (CGT).
The first report
The first report, published in November 2020, looked not only at the rate of tax but the annual exempt amount and rules relating to transfers and to business reliefs. Here’s a quick summary of the headline reforms proposed in the first report:
CGT rates should be aligned more closely with income tax rates;
taxpayers should be discouraged from disguising income as capital gains;
the existing CGT-free uplift on death should be removed; and
business asset disposal relief should be replaced with a relief more focused on retirement.
The net effect of all these reforms would be to increase the amount of CGT collected by HMRC. Around 265,000 people pay CGT each year, paying an average of around £32,000 in tax. Both the pool of people paying CGT and the relative tax yield are small compared to income tax which generates £180bn per year.
To put that another way, simply increasing the rate of tax won’t do much to improve the nation’s finances. Indeed, if the tax rate rises the tax yield may fall as planning is undertaken to defer CGT, when taxpayers would otherwise have been happy to pay the tax immediately at a lower rate.
Widening the CGT net by including more people would be administratively burdensome for HMRC as it would require more individuals to file tax returns. In our view, simply raising the level of CGT is not the answer for modernising the capital taxes regime. The factors at work are complicated and require a joined-up review of all capital taxes once the OTS evidence-gathering phase is complete.
The second report
That point has now been reached with the publication of the second OTS report which concentrates on resolving some of the complexities in the CGT regime. The key recommendations here are:
make it easier for the 1.4m people who have more than one home to nominate which qualifies for private residence relief (PRR), perhaps enabling nominations to be made on disposal;
extend the PRR to cover garden developments which are subsequently occupied by the homeowner;
fix the problems with the current 30-day system for reporting and paying CGT on UK property, and double the period to 60 days;
integrate all the three current methods of paying CGT into a single tax account, while also abolishing the need to make multiple returns in respect of the same disposal;
extend the no gain/no loss window for separating taxpayers to allow them to settle their affairs by transferring assets tax-free before the end of the tax year at least two years after separation, or for such longer reasonable time as is set by the court;
scrap the tax charge which may arise when leases are extended by a flat management company owned by the leaseholders; and
make HMRC more user friendly by providing better guidance, better systems and by relaxing inflexible rules which trip people up.
What happens next?
That very much depends on the chancellor and the Treasury. It would not be unprecedented for them to ignore expert reports which they have commissioned, perhaps kicking the can down the road with a call for further review to cover trusts, partnerships and international matters. However, faced with the twin pressures of modernising the tax system while raising more revenue, we may well see specific proposals for reforming CGT included in the next Budget.
Last week, the Office of Tax Simplification published the second volume of its recommendations for the reform of capital gains tax (CGT).
The first report
The first report, published in November 2020, looked not only at the rate of tax but the annual exempt amount and rules relating to transfers and to business reliefs. Here’s a quick summary of the headline reforms proposed in the first report:
CGT rates should be aligned more closely with income tax rates;
taxpayers should be discouraged from disguising income as capital gains;
the existing CGT-free uplift on death should be removed; and
business asset disposal relief should be replaced with a relief more focused on retirement.
The net effect of all these reforms would be to increase the amount of CGT collected by HMRC. Around 265,000 people pay CGT each year, paying an average of around £32,000 in tax. Both the pool of people paying CGT and the relative tax yield are small compared to income tax which generates £180bn per year.
To put that another way, simply increasing the rate of tax won’t do much to improve the nation’s finances. Indeed, if the tax rate rises the tax yield may fall as planning is undertaken to defer CGT, when taxpayers would otherwise have been happy to pay the tax immediately at a lower rate.
Widening the CGT net by including more people would be administratively burdensome for HMRC as it would require more individuals to file tax returns. In our view, simply raising the level of CGT is not the answer for modernising the capital taxes regime. The factors at work are complicated and require a joined-up review of all capital taxes once the OTS evidence-gathering phase is complete.
The second report
That point has now been reached with the publication of the second OTS report which concentrates on resolving some of the complexities in the CGT regime. The key recommendations here are:
make it easier for the 1.4m people who have more than one home to nominate which qualifies for private residence relief (PRR), perhaps enabling nominations to be made on disposal;
extend the PRR to cover garden developments which are subsequently occupied by the homeowner;
fix the problems with the current 30-day system for reporting and paying CGT on UK property, and double the period to 60 days;
integrate all the three current methods of paying CGT into a single tax account, while also abolishing the need to make multiple returns in respect of the same disposal;
extend the no gain/no loss window for separating taxpayers to allow them to settle their affairs by transferring assets tax-free before the end of the tax year at least two years after separation, or for such longer reasonable time as is set by the court;
scrap the tax charge which may arise when leases are extended by a flat management company owned by the leaseholders; and
make HMRC more user friendly by providing better guidance, better systems and by relaxing inflexible rules which trip people up.
What happens next?
That very much depends on the chancellor and the Treasury. It would not be unprecedented for them to ignore expert reports which they have commissioned, perhaps kicking the can down the road with a call for further review to cover trusts, partnerships and international matters. However, faced with the twin pressures of modernising the tax system while raising more revenue, we may well see specific proposals for reforming CGT included in the next Budget.
