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Capital Gains Tax Consultation

Author Image Graeme Robb Senior Technical Manager
6 minutes read
Last updated on 3rd Aug 2020

Back in January 2018 - the Chancellor (Philip Hammond) asked the Office of Tax Simplification (OTS) to carry out a review of Inheritance Tax (IHT). The OTS subsequently issued two reports. The first on administrative aspects and the second on complexities and technical issues with the ball now in the government’s court. These recommendations are explored here.

We now have a different Chancellor, but Rishi Sunak has been back in touch with the OTS. This time regarding Capital Gains Tax (CGT).

The Chancellor’s letter

“I would like the OTS to undertake a review of CGT and aspects of the taxation of chargeable gains in relation to individuals and smaller businesses.

I would like this review to identify and offer advice about opportunities to simplify the taxation of chargeable gains, to ensure the system is fit for purpose and makes the experience of those who interact with it as smooth as possible, as set out in the agreed terms of reference.

This review should 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."

The OTS response

The OTS published a scoping document.

The themes are outlined below.

Also, on 14 July the OTS published an online survey and a call for evidence to seek views about CGT.

The call for evidence comes in two sections

1)     High-level comments on the principles of CGT required by 10 August 2020.

2)     The second and primary section of the document invites more detailed comments on the technical detail and practical operation of CGT by 12 October 2020.

The earlier deadline for comments on the principles of CGT, will help shape the balance of the work and could put the OTS in a position to provide an interim update on those bigger picture issues. The OTS will also be meeting interested parties online.

The OTS wants to hear directly from individuals and businesses as well as professional advisers and representative bodies about which aspects of CGT are particularly complex and hard to get right, and to hear any suggestions for improvements.

The survey will enable the OTS to hear directly from individuals with experience of dealing with CGT.

The online survey (open and available until the end of summer)

I completed the survey  and it contained a number of standard questions. For example.

  • Have you ever reported capital gains to HMRC?
  • Have you used the real time CGT service?
  • Your approximate CGT liability in the last tax year?
  • When you last reported why did you use an adviser?
  • When you last reported why didn’t you use an adviser?
  • Which aspect of CGT took you the longest?
  •  Are you a business owner?
  • Did you use tax or accounting software?

The survey did highlight a couple of interesting facts.

  • The percentage of taxpayers in the UK who paid UK CGT in 2017/18 was less than 1%.
  • In 2017/18 the CGT proportion of the total tax revenue collected by the government was 1%.

The call for evidence on principles

Regarding the principles of CGT, these are the themes identified by the Chancellor.

  • Allowances, including the annual exempt amount its level and the extent to which it distorts decision making.
  • Exemptions and reliefs, including how they fit together and the extent to which they incentivise some decisions over others.
  • The treatment of losses within CGT, including the extent to which they can be used and whether the loss regime distorts decisions about when to buy or sell assets; and 
  • The interactions of how gains are taxed compared to other types of income, including how the boundary between what is taxed as gains rather than income works. Should there be different regimes for short‐term gains, compared to long‐term gains

The main call for evidence

The review aims to explore simplification opportunities across the following areas

  • The overall scope of the tax and the various rates which can apply
  • The reliefs, exemptions and allowances which can apply, and the treatment of losses
  • The annual exempt amount and its interactions with other reliefs
  • The position of individuals, partnerships and estates in administration but not trusts or residence and domicile issues 
  • The position of unincorporated businesses, including the setting up, selling or winding up of such businesses
  • The position of stand‐alone owner‐managed trading or investment companies but not the positions of large or group company structures
  • Any distortions to taxpayers’ personal or business investment decisions
  • Interactions with other parts of the tax system such as Income Tax, Capital Allowances, Stamp Duty Land Tax (SDLT) and Inheritance Tax

These questions from the call for evidence document are particularly relevant for mainstream financial planning.

  • To what extent do the current CGT rules influence decisions around whether, how or when taxpayers acquire or dispose of assets? And to what extent and how do taxpayers adjust their activity to reflect this?
  • In your experience, to what extent do individuals or their agents arrange to time disposals of assets in such a way as to maximise use of their AEA to manage down their tax liabilities?
  • Could there be a simpler or more targeted way of taking small gains out of tax?
  • To what extent do the different rates of CGT cause complexity? Is it always clear which tax rate should apply? Which situations present specific problems? Does the dependence on the income tax higher rate threshold make this inevitable? Do you think the rates position could be made simpler, and if so how?
  • Are there any aspects of the rules relating to the taxation of gains or losses realised on the disposal of shares and securities that are particularly complex to understand or apply? Are you aware of any difficulties in ascertaining the base cost of such assets, such as the share matching rules?
  • To what extent does the absence of a CGT charge on death and transferring those assets at market value on death distort and complicate the decision‐making process around passing on assets to the next generation

Remember that the OTS gives independent advice to the government on simplifying the UK tax system, to make things easier for taxpayers. When it comes to fairness, etc. then these are policy, rather than simplification, issues which is outside the remit of the OTS.

We will keep you posted.

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