Capital Gains Tax ... Look out for significant possible changes

 

The Government recently asked the
Office of Tax Simplification (OTS)
to perform a review of the current
Capital Gains Tax (CGT) rules
and suggest some amendments to
the current regime.

The OTS have prepared a 131 page document which they have described as a “framework of policy choice” with their recommendations which has been issued to the various professional bodies (ATT, CIOT, ICAEW etc) for consideration and comment before being passed back to the Government.

There are four key areas for consideration in the OTS’ opinion which are:

  • Rates and Boundaries with Income Tax
  • The Annual Exempt Amount
  • Capital Transfers
  • Business Reliefs. 

The OTS is the independent adviser to government on simplifying the tax system.  They can make recommendations but it doesn’t automatically mean the government will adopt all (or any) of them.

At this stage these are simply proposals and the vast majority may never make it into the tax system.  We summarised below some the key CGT recommendations of the OTS’ report so that should any of the recommendations make it through to law, we are best placed to advise of the impact to you:

  • aligning Capital Gains Tax rates with Income Tax rates or perhaps re-considering the boundary between the two regimes, such as when taxing retained earnings on the liquidation of a small owner-managed company.  Could this see CGT rates of up to 45% and restricted tax planning opportunities for extracting profits from smaller companies?
  • reducing the level of the Annual Exempt Amount (currently £12,300 per person for 2020/21) perhaps to between £2,000 - £4,000;
  • removing the Capital Gains uplift on death – how would this interact with the current Inheritance Tax rules and in some form might this result in more people suffering tax on their estates?
  • a reform or perhaps complete abolition of ‘Investors Relief’
  • replace Business Asset Disposal Relief (BADR formerly Entrepreneurs Relief) with an alternative measure more focussed on retirement.  This could remove the current favourable rate of 10% for certain disposals of businesses and business assets.

As you can see, a couple of the main areas that would have the biggest effect on taxpayers would be the alignment of the Capital Gains Tax Rates (currently 10/20% or 18/28% on residential property) with Income Tax rates (20/40/45%) and any proposed reduction in Annual Exempt Amount, bringing more people disposing of assets within the charge to CGT. 

It is understood  that if the Government wanted to more closely align CGT rates with those of Income Tax then they may need to consider reintroducing a form of relief on ‘Inflationary Gains’ and consider the implications of the tax position of companies – a reintroduction of Indexation Allowance perhaps or a rebasing of the ‘base cost’ of certain assets?  Is that really simplification? 

A second report focussed on more technical areas and the consultation period closed on 9th November and this discussed the added complexity and problematic 30 Day CGT reporting and payment regime on the disposal of residential property, which the Institute of Chartered Accountants England and Wales described as ‘Very Problematic’ on the basis that this service cannot be easily found on the Governments website and it is not clear as to why a separate CGT account and agent authorisation are required. 

Principal Private Residence Relief (PPR) was also discussed within this report and the modernisation of this relief to include specific provision for couples ‘living apart’ but in separate ‘main residences’.  There is also consideration for the Government to reconsider the 9 month final period of Ownership exemption particularly in  light of the Coronavirus pandemic and that perhaps in the current market a 9 month exemption is ‘insufficient’? There is also consideration that perhaps PPR nominations could be simplified if taxpayers were able to nominate the property as their PPR at disposal, similar to the rules available to Non-Residents who currently make nominations on disposal. 

There is no clarity when any changes/rules (if adopted) may come into force.  A Budget Speech from the government is expected in the spring (possibly mid to late March) so it is unlikely there will be any official announcements before that time. 

We wouldn’t recommend any knee jerk reactions in terms of trying to sell assets or alter the ownership of assets before the possible changes are better understood.  However, anyone holding assets that are standing at significant gains should consider contacting us to discuss their options.  Please also monitor our social media feeds as well as the press generally for details of any further announcements as they are made. 

If you are already in the process of selling assets on which gains will arise then it is certainly worth ensuring that those disposals take place and are completed sooner rather than later.  Again, please contact us for our latest views and more detailed and focused advice. 

Watch this space.  If you require our assistance/specific advice, please contact either: 

George Hardey (george.hardey@waltonscw.co.uk)
Director/Head of Tax

or

Paul Buckley (paul.buckley@waltonscw.co.uk)
Associate