This week, the Office of Tax Simplification (OTS) released a report on Capital Gains Tax (CGT). These follow a request by Rishi Sunak, Chancellor of the Exchequer, 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.”
Given the huge amount of public spending the chancellor has introduced this year to keep businesses and individuals afloat during the pandemic, it is no surprise that he is looking at ways to increase government revenue.
There is a growing concern that substantial changes to the tax regime are coming. The release of 136-page OTS review - which was released on 11 November and is the first of two reports - has investigated policy design and principles underpinning the Capital Gains Tax as requested by the chancellor.
It details that 265,000 UK individuals are CGT taxpayers, which is clearly dwarfed by the number who pay Income Tax – roughly 31.2 million. However, the average amount paid for CGT is reported as five times that of Income Tax.
It is important to note that CGT and Income Tax are designed to tax different forms of economic activity, with different factors affecting the sum taxed, including in the case of CGT, inflation. In my view, and given the difficulties highlighted by the OTS below, the division between CGT and Income Tax is important and justified.
The report also considers a number of issues, and the resulting recommendations pose a greater risk to some taxpayers than others; including those taxpayers holding Inheritance Tax (IHT), relievable assets (i.e. APR and BPR) or taxpayers remunerated through shares schemes.
Aligning rates of tax
This is certainly not the first time it has been suggested that CGT and Income Tax are aligned. However, the report identifies many complexities and highlights the knock-on effect of doing so. This includes the potential disincentive for taxpayers to give assets away during their lifetime, which there has seemingly been a push toward in recent years.
Reducing the number of rates
An apparently less complex suggestion is to simply reduce the number of CGT rates. This could include a ‘normal rate’ and a ‘relieved rate’ where business asset disposal relief could apply.
Reducing the Annual Exempt Amount
The current annual exempt amount is £12,300, with capital gains rates not applying below this threshold. The report suggests reducing this to around £4,000 – although this seems to depend on whether the purpose of the Annual Exempt Amount is to act as a minimum administrative threshold, to compensate for inflation or as a general relief for taxpayers.
Changes to tax on death
At present, it is possible for taxpayers to pass assets benefiting from APR and/or BPR at death, at market value and for that transfer to be free of both CGT and IHT. The OTS has recommended again - it was previously raised in the OTS report on IHT- "that a taxpayer should not get both an Inheritance Tax exemption and a Capital Gains Tax death uplift.”
The OTS prefers a no gain, no loss approach, which would essentially provide for a similar effect on death as holdover relief provides for gifts in a lifetime. Any change may also come with a widening of holdover relief, which applies to and a change to the ‘rebasing dated from 1982 to 2000.
Changes to BADR and Investors’ Relief
Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief) is under threat again. The report recommends that it be replaced with another relief targeted at retirement. The message in respect of Investors’ Relief, appears to be simple – abolish it.
We cannot say when the changes will be brought in, or even that the recommendations will be enacted by the Government. It is possible that changes to the CGT and/or IHT regime will feature in the Spring Budget. We recommend that you review your estate and tax planning strategy as soon as possible, as any changes may well be backdated to the time of the announcement.