2 March 2021
The OTS Review of Capital Gains Tax
In July 2020, the chancellor Rishi Sunak wrote to the Office for Tax Simplification (OTS) and requested that a review of the capital gains tax system be undertaken to offer advice as to how it could be simplified and to ensure it is fit for purpose. Read our latest article below to find out the results...
The chancellor asked the OTS 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.""
In response to this request, the OTS carried out a consultation which involved calls for evidence and extensive analysis of data. The OTS then published a report outlining its findings in November 2020. The consultation highlighted a number of areas where Capital Gains Tax (CGT) appears to be counter intuitive. There is divided opinion about CGT, some believing it to be a barrier to growth in the economy whilst others see it as holding back movement towards a more equitable society.
The report sets out a framework within which government could make some policy choices that may simplify CGT, making it easier to understand, improve the administrative efficiency and make the tax easier to predict. The framework is spread across four areas.
Rates and boundaries
There is a disparity in rates between capital gains and income tax which may create an incentive for individuals and families to arrange their affairs in a way in which income is effectively shown as capital gains. The OTS suggest in their report that should the government wish to address these distortions in behaviour, then it may be wise to consider aligning the CGT and income tax rates more closely.
Annual Exempt Amount
The Annual Exempt Amount is relatively high and in the year 2017-18 around 50,000 people reported net gains just below the exempt amount. The report suggests that if the government has the exempt amount in place to serve as a de minimus amount for administration, it may wish to consider reducing the level. The report went on to say that if the annual exempt amount is reduced, the government should also consider reforms to other areas such as the chattels exemption and make improvements to the real time capital gains service.
Interaction with lifetime gifts and Inheritance Tax
Capital Gains Tax in its current form encourages the transfer of assets, either business or personal, to others upon one's death, which may not be what is best for the business, the economy or the people involved. The OTS made some recommendations regarding the removal of the capital gains uplift upon a person's death. This, it believes, would not affect anyone who retained inherited assets, but would have significant ramifications for those who sell recently inherited assets who would thus be liable for a tax charge.
The report encouraged government to consider how the use of capital gains reliefs would stimulate business investment. The report suggested that Business Asset Disposal Relief should be replaced with a different relief which is more focused on retirement and that the Investors Relief should be abolished all together.
Overall, the report included eleven recommendations for government to consider and make policy choices. Compilation of the report has been informed by a wide range of input from academics, think tanks, the public, professional bodies and firms. It is worth noting that whilst the OTS makes recommendations for consideration by the government, it is not involved in implementing change. A second report on the key technical and administrative issues found as part of the consultation will be published in the early part of this year.
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