A new report devoted to CGT was published by the Office of Tax Simplification (OTS) on 11 November 2020. This was in response to a Government request “to identify opportunities relating to administrative and technical issues as well as areas where the present rules distort behaviour or do not meet their policy intent”. The review revealed a range of areas for review, including;
Aligning income tax and CGT more closely. The report outlines that “the disparity in the rates between CGT and IT distort business and family decision making and creates a taxpayer to arrange their affairs in ways that effectively re-characterise income as capital gains”. Any alignment in tax rates will not be good news for anyone selling assets such as investment properties, second homes and shareholdings. No rate has been suggested but full alignment would result in a top CGT rate of 45%.
Reducing the annual CGT exemption from £12,300, because the “high level of the exemption can distort investment decisions”. The report recommends that any reduction is in conjunction with reforms to the current chattels exemption. However, it is important that taxpayers are not unnecessarily brought into self assessment for reporting smaller one off capital gains.
The report also looks at the interaction of CGT with Inheritance Tax, and given that the OTS has also made recommendations in this area in an earlier report changes are expected. The findings conclude that “CGT incentivises owners to transfer business and personal assets to others on death rather than during lifetime”. It is, therefore, possible that we will see the tax free uplift on death for CGT removed where an asset qualifies for an exemption or relief, e.g. agricultural and business property relief. This would come with further complications as the capital gains tax history for such assets is also often complex and can go back over a number of years, so there will be a reliance on maintaining good records for assets such as agricultural land and buildings.
Lastly, the Government is again looking at the extent to which CGT reliefs are used to “stimulate business investment and risk taking”. It would seem that the new Business Asset Disposal Relief provisions could be subject to further tweaking, and there was even mention of a new relief focussed on retirement. Not so much of the “new” as retirement relief was phased out from 6 April 1999. Further changes could also be seen in the way accrued profits of owner-managed businesses are taxed, and where shares are provided as a “reward” to employees.
Whilst we do not know how much of the report will be implemented by the Government, we do know that they will be looking to fill the deficit caused by the coronavirus measures and that there are likely to be changes ahead. A second report on the technical and administrative aspects of the tax is due early next year.
So now is a good time to review your investment strategy, particularly if you are likely to be impacted by changes to CGT and Inheritance Tax.