French Duncan | 28 May 2021
On 20 May 2021 the Office for Tax Simplification (OTS) issued its second report on reviewing the UK Capital Gains Tax (CGT) system. The content was less aimed at tax policy changes (and how rule or rate changes could generate more tax revenue) but more on how IT systems, time spent on administration and the practicalities of the system could be changed to help improve the CGT regime for taxpayers.
The proposed changes fall into a mixture of areas of CGT but are mostly focussed on individuals and smaller businesses ranging across administration, the main home, divorce and separation, business and investor issues and land and property.
What is the OTS trying to achieve?
As it says on the tin, the OTS is trying to simplify the UK CGT system, level the playing field for taxpayers who do not use professional advisers and create greater awareness of how the system actually operates to ensure that the uninformed do not fall foul of quirks and nuances in the legislation.
So far, their success in convincing the Chancellor to turn recommendations into legislative changes has been muted. However, their suggestions have created greater awareness of what is currently failing in the tax system and generated discussions amongst the populace, at a time when potential tax changes are at the forefront of most people’s minds.
Summary of actions that are being recommended
In summary, the OTS has recommended that 14 actions are taken to simply the CGT system as follows:
Awareness and administration
- HMRC should integrate different ways of reporting and paying CGT into the Single Customer Account to ensure that one hub exists for holding taxpayers CGT data on, for example, disposals, capital losses, main residence elections and holdover relief claims.
- Formalise the administrative arrangements for the real time CGT service so filings do not need to be duplicated across returns, for example, only one of a CGT Property tax account and Self-Assessment tax return should be required (unless there is an additional requirement to complete the latter).
- Consider extending the reporting and payment deadline for UK Property tax return to 60 days (from 30 days), or mandate estate agents or conveyancers to distribute HMRC provided information to clients about these requirements.
- Consider removing the requirement to pool shares or units where the same investment is held across more than one portfolio thereby reducing complexity and errors where individuals hold the same investment across multiple investment managers.
- Consider adjusting Private Residence Relief (PPR) to cover developments in a taxpayer’s garden which the taxpayer subsequently occupies to equalise the position with taxpayer’s who are able to sell part of their garden to a developer and claim PPR relief.
- Review the practical operation of PPR nominations, raise awareness by requiring property agents to distribute information to purchasers of a new property, and, in time, enable nominations to be captured through the Single Customer Account (see above).
Divorce and separation
- Extend the no gains no loss window on separation to the later of:
- The end of the tax year at least two years after the separation event (rather than one year); or
- any reasonable time set for the transfer of assets in accordance with a financial agreement approved by a court or equivalent processes in Scotland on how a couple should rearrange their affairs.
- For more complex transactions, it should be considered whether CGT should be paid at the time cash is received in situations where proceeds are deferred (rather than, in some cases, valuing and paying CGT on a future right), while preserving eligibility to existing reliefs.
- Consider enabling an irrevocable provision in legal documents for a corporate bond to specify that it is subject to CGT, and, in the absence of such a provision, to mean it is exempt from CGT.
- Given the complexity and depth, the rules for Enterprise Investment Schemes (EIS) should be reviewed, with a view to ensuring that procedural or administrative issues do not prevent their practical operation, for example, removing the requirement that Income Tax relief is linked to CGT disposal relief.
- To bring the position into line with foreign currency bank accounts so that currency gains are not subject to CGT, consider whether foreign gains or losses on foreign assets should be calculated in the relevant foreign currency and then converted into sterling.
Land and property
- Expand the specific Rollover Relief rules which apply where land and buildings are acquired under Compulsory Purchase Orders, including expanding the time limit for reinvestment.
- Further consideration to be given to land pooling arrangements to ensure that these are more tax neutral and/or introducing a regulated land pooling vehicle to freeze the tax status at the point of entry – this is an area which requires further review and, as such, no specific recommendations have been given yet.
- HMRC should improve their guidance in a number of recommended areas including, but not limited to, UK Property tax returns, when a loan to a business becomes irrecoverable, EIS and land pooling.
What does it all mean?
As always, the reports issued by the OTS are only recommendations at this stage and, while these may be persuasive, it is for the Chancellor to consider whether they are implemented into law.
There has been an increasing number of reviews and discussion documents published in the last 12 -18 months both in the UK and internationally which point towards some form of reform either for CGT or Inheritance Tax (IHT), however, there is still no transparency on when these reforms could, or if they will, be implemented.
What we do know, however, is:
- For the period 1 April 2020 to 31 March 2021, the public sector borrowed £303.1 billion, £246.1 billion more than in the same period last year.
- For the same period, the public sector spent more than it received in taxes and other income, requiring it to borrow £28.0 billion, £21.0 billion more than it borrowed in March 2020.
- For the 2020/2021 tax year, CGT (£10.6 billion) and IHT (£5.3 billion) generated combined total tax revenues of £15.9 billion relative to a total tax take of £584.3 billion so both are a relatively small compared to the total tax take in the UK and such changes may have a small impact on how much tax revenue is collected.
- Increasing tax rates and eliminating and/or removing reliefs does not directly increase tax revenue as such shifts can alter taxpayers behavior and given, CGT and IHT, are in effect, “voluntary” taxes, it is questionable if changes in these areas are best to generate increased revenues without damaging potential growth for aspiring entrepreneurs and recovering businesses.
The increased spending and borrowing is a fact which cannot be ignored but, there are still many beneficial CGT and IHT reliefs in existence. These reliefs continue to be in place, until at least the Autumn Statement, so if you need advice or want to understand what these reliefs are and how they can protect your wealth and/or business, please feel free to get in touch for a chat.