Capital Gains Tax review is published

On 11^th November 2020, the Office for Tax Simplification published “Simplifying by Design”, its first report on the review of capital gains tax (CGT). As a reminder, this work was done on the instruction of the Chancellor of the Exchequer, and I covered the brief in an earlier blog during the summer.

A search of the 135-page report reveals no mention of personal injury damages, a group of individuals to whom CGT matters more than most.

The key recommendations that are most relevant to our clients are:

• To align the rates of CGT more closely with income tax rates;
• Such realignment should also be accompanied by the reintroduction of a relief for the effects of inflation, i.e. so that purely inflationary gains are not taxed;
• The annual exempt amount should be reduced; and
• Investment managers and ‘others’ (IFAs perhaps?) to be made responsible for reporting gains, as opposed to the current onus on taxpayers.

It seems unlikely that income tax rates will alter materially immediately, given the need to counter the economic damage caused policy responses to Covid-19. However, there is also a pressing need for government to increase tax revenues at some point, so as to begin the seemingly long process of repaying debt incurred due to loss of revenues, economic support measures and expenditure on public health.

The recommended reintroduction of an indexation relief is a welcome move, even if it runs counter to simplification of the tax. However, the direction of travel is clear:

• Income tax rates will be higher in the future; and
• CGT rates will be higher in the future too, and it may be expected that they will be altered ahead of any other increases in tax.

The report also covers the interactions between CGT and other taxes, notably Inheritance Tax and Corporation Tax. As those are less relevant for our clients, they are not covered here.

For those who are interested, these are the summary recommendation contained in the report in full:

Rates and boundaries

1. If the government considers the simplification priority is to reduce distortions to behaviour, it should either:

• Consider more closely aligning Capital Gains Tax rates with Income Tax rates; or
• Consider addressing boundary issues as between Capital Gains Tax and Income Tax.

2. If the government considers more closely aligning Capital Gains Tax and Income Tax rates it should also:

• Consider reintroducing a form of relief for inflationary gains;
• Consider the interactions with the tax position of companies; and
• Consider allowing a more flexible use of capital losses.

3. If there remains a disparity between Capital Gains Tax and Income Tax rates and the government wishes the simplification priority is to make tax liabilities easier to understand and predict, it should consider reducing the number of Capital Gains Tax rates and the extent to which liabilities depend on the level of a taxpayer’s income.

4. If the government considers addressing Capital Gains Tax and Income Tax boundary issues, it should:

• Consider whether employees and owner-managers’ rewards from personal labour (as distinct from capital investment) are treated consistently and, in particular; and
• Consider taxing more of the share-based rewards arising from employment, and of the accumulated retained earnings in smaller companies, at Income Tax rates.

The Annual Exempt Amount

5. If the government’s policy is that the Annual Exempt Amount is intended mainly to operate as an administrative de minimis, it should consider reducing its level.

6. If the government does reduce the Annual Exempt Amount, it should do so in conjunction with:

• Considering reforming the current chattels exemption by introducing a broader exemption for personal effects, with only specific categories of assets being taxable;
• Formalising the administrative arrangements for the real time capital gains service, and linking up these returns to the Personal Tax Account; and
• Exploring requiring investment managers and others to report Capital Gains Tax information to taxpayers and HMRC, to make tax compliance easier for individuals.

Capital transfers

7. Where a relief or exemption from Inheritance Tax applies, the government should consider removing the capital gains uplift on death, and instead provide that the recipient is treated as acquiring the assets at the historic base cost of the person who has died.

8. In addition, the government should consider removing the capital gains uplift on death more widely, and instead provide that the person inheriting the asset is treated as acquiring the assets at the historic base cost of the person who has died.

9. If the government does remove the capital gains uplift on death more widely, it should:

• Consider a rebasing of all assets, perhaps to the year 2000; and
• Consider extending Gift Holdover Relief to a broader range of assets.

Business reliefs

10. The government should consider replacing Business Asset Disposal Relief with a relief more focused on retirement.

11. The government should abolish Investors’ Relief.