Yesterday saw The Office of Tax Simplification (OTS) respond to Rishi Sunak’s request from July for a shake-up of the Capital Gains Tax report. The Chancellor asked the OTS, in particular, 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.’
Showcasing a policy framework, which is up for consideration from the government to simplify and smooth out the design of the CGT. The OTS is looking to Make it easier to predict and understand the bigger picture going forward. Putting a particular focus on 4 key areas –
Rates and boundaries – Currently for the basic rate of income tax paid, the CGT levy is at 18% on second homes and buy to lets, and 10% on other assets. For higher rate taxpayers, the rates are 28% and 20% respectively. The OTS is suggesting that the government aligns CGT rates with income tax rates, raising the maximum CGT rate of 28% closer to income tax rates, where the top rates are 40% and 45% in England and Wales.
Annual Exempt Amount – The current allowance means that the first £12,300 of profits from trading in shares and property is currently free of CGT. But the OTS suggests that the government “should consider reducing its level” to between £2,000 and £4,000. This relatively high level of the Annual Exempt Amount can distort investment decisions. In the tax year of 2017-18, around 50,000 people reported net gains just below this threshold.
Interaction with lifetime gifts and Inheritance Tax – Currently it is suggested that the CGT structure encourages business owners to transfer their business and personal assets to others “on death” rather than during their lifetime, which the OTS considers not to be best for the business, the individuals or families involved, or the wider economy. As things stand, if someone inherits a £250,000 portfolio which was once £100,000, the £150,000 gains are wiped and the £250,000 figure used as the base value if they then go on to sell the portfolio.
Business Asset Disposal Relief (formally entrepreneurs’ relief) – The OTS report says there is a policy judgment for government to make regarding the CGT reliefs use in seeking to stimulate business investment and risk-taking. The OTS claims the government should increase the minimum shareholding to 25%, so that the relief goes to owner-managers rather than to a broader class of employees; increasing the holding period, to ensure the relief only goes to people who have built up their businesses over time.
The review, which has been curated into two reports, the first which was released 11 November 2020 covers policy design and principles underpinning CGT. The second, due in early 2021 which will go into more detail into the administrative and technical issues.
These recommendations put pressure on all tax planning to be completed prior to the tax return deadline of 31st January 2021.