Disaster or dull – what the CGT review might mean for financial planners
In July 2020 Rishi Sunak wrote to the Office for Tax Simplification to undertake a review of Capital Gains Tax as it applies to individuals and smaller businesses.
He asked for the review to advise about opportunities to simplify taxing capital gains to ensure the system is fit for purpose. In particular he expressed an interest in allowances, exemptions, reliefs, the treatment of losses and the interaction of how gains are taxed compared to other types of income.
What does the OTS do?
It gives independent advice to the government on simplifying the UK tax system, to make things easier for taxpayers. It’s a small team drawn from the Treasury, HMRC and the private sector.
It’s important to understand that it doesn’t implement changes - these are a matter for government and for Parliament. The OTS remit is really all about improving the experience of those who interact with the tax system. It aims to reduce the administrative burden - which is what people encounter in practice - as well as looking to simplify rules.
So for example, it’s not the place of the OTS to say let’s scrap CGT and introduce this new regime that we’ve devised. Likewise, it’s not for them to say CGT should be 40%. Instead its remit is to look at the existing CGT regime and suggest how it could be made better i.e. simpler.
Some of its recommendations are taken on Board by the Government and some are ignored. In the past roughly 50% of its ideas have been accepted.
Where have we got to with it all?
On 14 July the OTS published an online survey and a call for evidence to seek views about CGT.
The call for evidence came in two sections
- High-level comments on the principles of CGT, and
- The second and primary section of the document invited more detailed comments on the technical detail and practical operation of CGT.
The OTS published “Capital Gains Tax review – first report – simplifying by design” on 11 November. This report covered the feedback on the first part of the call for evidence.
The second report is expected early in 2021 and will explore “key technical and administrative issues”
What was in the report?
This first report highlights many features of CGT which can distort behaviour, including its boundary with Income Tax and interconnections with Inheritance Tax.
The recommendations fall into 4 interlinked areas where there are policy choices for government to make
- Rates and boundaries
- The Annual Exempt Amount
- Interaction with lifetime gifts and IHT
- Business Reliefs
The underlying theme of their recommendations is the focus on tackling aspects which distort behaviour or introduce complexity.
What did it say on Rates & Boundaries?
There are four different rates of CGT all of which are lower than the equivalent standard rates of Income Tax.
|Basic Rate||Higher Rate||Additional Rate|
The problem? By definition, complexity.
It also creates a distortion. The lower rates of tax on gains incentivise taxpayers to look at ways to turn what would otherwise be income into gains e.g. share based remuneration schemes.
The other thing found was that the gains fall on a relatively small number of taxpayers, who benefit where others do not.
If there were greater alignment then there would be less incentive to “turn income into gains” so less need for complex anti-avoidance rules to police the boundary.
The boundary is essentially the line where income becomes gains and vice versa. The key areas where the boundary is under pressure are in share based remuneration schemes and the accumulation of earnings in owner managed companies. Not areas that impact main stream planning and the area focussed on in the report.
There were 4 recommendations in this area and one half of one of them was the headline grabber – “consider more closely aligning Capital Gains Tax rates with Income Tax rates”.
What about the Annual Exempt Amount?
What is it actually for? A de minimis designed to reduce the number of tax payers, a relief akin to the personal allowance for income or a simple way to allow for a bit of inflation proofing?
At £12,300 for 2020/21, many consider the AEA to be too high so operating more like a tax relief than an administrative de minimis.
The report notes that in 2017/18 approximately 50,000 reported net gains just below the threshold. Clearly showing that it does impact investors decision making. Or good tax planning if you’re a planner!
It’s estimated that in 2021/22 CGT taxpayers would double if AEA was reduced to £5,000 and tripling if £1,000.
There were two recommendations here. Primarily, reducing the level of the AEA.
Reducing though causes greater admin and brings more people into the tax system. If the government were to consider reducing the AEA there are further recommendations to deal with the increased amount of taxpayers. These are:
- amending the chattels regime to reduce the amount of asset types that are subject to CGT,
- ensuring the CGT regime operated “real time” with gains fed into personal tax accounts, and
- asking investment managers to calculate and report gains to Individuals and HMRC, to make tax reporting easier.
Asking managers to report gains, akin to the insurance bond chargeable event regime, would no doubt be welcome for clients and planners alike but perhaps not so much for the investment managers!
If the AEA is reduced it will be interesting to see if it just means people will reduce their withdrawals to remain within the allowance. On another point, if the AEA remains as is and the recommendation to align tax rates is implemented, this would be largely of no consequence for those just buying and selling investments within the AEA i.e. a lot of people. Those selling businesses might not be so happy and holding properties as an investment less attractive. Another tax nail in the “property is a better bet for retirement/buy to let” coffin?
And the interaction with IHT?
Transferring your capital, whether lifetime gifting or on death, impacts IHT and CGT. Both taxes have different rules and different policy rationales. But there is also a fair amount of overlap.
The current rules aren’t that coherent and are creating distortion.
A few examples illustrate the point:
- Bob dies with assets qualifying for business relief – no IHT and no CGT on death.
- Tom dies leaving his OEIC portfolio to his wife – no IHT, his gain dies with him and his spouse inherits at its current value.
- Roy makes a lifetime gift of investments to children – the gift is a disposal for CGT and if he dies within 7 years, then this will have an IHT impact.
The OTS are recommending amending the death treatment so that where an IHT relief or exemption applies then the CGT uplift on death (your gain dying with you) should not apply and the asset passes on a “no gain/no loss” basis. They have also suggested the removal of the CGT uplift entirely.
If there was a widespread removal of the CGT uplift then they recommend a rebasing of asset values, to make base costs better known (they suggest to year 2000) and looking at widening the availability of gift holdover relief.
This is no doubt a complex area that could be simplified and it does seem strange to allow a gain to die with you.
Changes in this area will clearly impact mainstream financial planning. And at the start of a reported £5.5 trn intergenerational wealth transfer over the next coupe of decades one to keep a close eye on for any change.
We seem to be in an age where there is a disparity between the taxation of income and capital – might this be an area that gets looked at?
What about business reliefs?
Entrepreneurs’ relief is a business relief and can deliver a 10% rate of CGT for gains up to £1m when you dispose of your business.
It’s now known as Business Asset Disposal Relief and the OTS think it’s mistargeted and doesn’t stimulate business investment or risk taking – it’s original purpose.
The OTS say this should be targeted at those retiring so perhaps introducing a holding period of 10 years (it’s 2 now) and have an age limit to essentially benefit just those that are retiring.
These changes will clearly affect SME business owner clients but perhaps one for the accountants mainly with an indirect impact for the planner involved in corporate investments or helping owners with extracting profits from their business. Perhaps it may incentivise more extraction.
Investors relief is relatively new, unpopular and should be abolished.
It remains to be seen when and if the Chancellor will make any changes to the CGT regime.
What, if any, changes are made could mean quite a shift for mainstream financial planning, be largely irrelevant “business as usual”, or somewhere in between.
Business owners and property investors may be “hit” or it might be ordinary investors. Or both.
The Chartered Institute of Taxation are cautioning against piecemeal CGT changes in the Budget...
"A diet of piecemeal Budget surprises would be unlikely to lead to a more coherent system or to achieve the best balance between these factors.”
Tinkering could no doubt lead to further complexity.
Perhaps we might see CGT simplification?
Bit like when we saw Pension Simplification 16 years ago.
ARTICLE by The Technical Team
Offshore Bond Taxation planning ideas
Information on tax planning with offshore policies, including what they are, time apportionment relief and excluded property trust.
ARTICLE by The Technical Team
@Oracle Guide to calculating Public Service Pension Input amounts
The question we get asked most frequently about public service pension schemes is how to calculate pension input.
ARTICLE by The Technical Team
What duties and responsibilities do trustees have?
Learn the duties and responsibilities of trustees