On 11 November 2020, the Office of Tax Simplification ("OTS") published its review of Capital Gains Tax ("CGT"). This followed a request from the Chancellor to renew the tax in July 2020. That the OTS has put together a 135 page report with 11 recommendations in a relatively short space of time may go some way to suggest that CGT is an area that is long overdue for reform.
The OTS review focuses on the idea that a "non-neutral tax system risks incentivising inefficient economic activity, complex sub-optimal decision making, or encouraging people into socially wasteful effort to reduce their tax payments by changing the form or substance of their activities".
This can be seen in the disparity between income tax and CGT. Income tax raises £180 billion a year, but the number of people paying means the average liability is £5,800; for CGT, the corresponding figures are £8.3 billion and £32,000. From CGT's earliest days, there was criticism that there was no good reason for the tax to be so different to income tax, and the OTS recommendations suggest ways to redress this balance.
Several recommendations made relate to
- the CGT charge rates;
- the relative opportunities for taxation between income and gains in a business and entrepreneurial context;
- the application of CGT to transfers before and after a person's death; and
- the connection between CGT, income tax and inheritance tax.
Changing rates and exempt amounts
A key recommendation made by the OTS is that the Government should consider aligning the CGT rates with those for income tax or addressing the boundary issues between the two taxes. One aspect of this suggestion is to reduce the Annual Exempt Amount (currently £12,300) but to make broader changes to the scheme to limit the charge to certain assets.
Link with inheritance tax
In a repeat from its report on inheritance tax, the OTS has also recommended that a taxpayer should not get both an inheritance tax exemption and a CGT uplift. The OTS has considered that there may need to be alternatives such as a no gain no loss approach where the recipient is treated as acquiring the assets at the historic base cost of the person who has died, or a general rebasing to a later year for all assets.
The OTS has also made recommendations regarding investors' relief and business asset disposal relief (formerly known as entrepreneur's relief). The OTS view considers that the business asset disposal relief is not appropriately targeted if its objective is to stimulate business investment and risk taking. Instead the focus should be on a relief which applies when business owners retire because the investment by an individual in their business can be an alternative to a pension.
Linked recommendations include the increasing in the minimum shareholding, increasing the holding period to a period of up to 10 years, and reintroducing an age limit (perhaps linked to the pensions freedoms).
The OTS has also recommended, following consultation responses from a wide range of professionals and individuals, that investors' relief should be scrapped, as "almost no-one has shown any interest in the relief or is using it."
What to expect next
The review will have been sent to the Chancellor for his consideration. As Mr Sunak is currently considering how he will fund the country's finances following the economic hit caused by the pandemic, we should not be surprised if some of these recommendations are put into effect. As was suggested prior to the aborted Autumn Statement, those with second homes or buy-to-let properties are likely be subject to higher CGT rates on disposal, and this report supports that recommendation. However, we await the Chancellor's response to the recommendations made and will post again when we have further news.