‘Simplifying by design’
Well, there we have it! In short order the Office of Tax Simplification (OTS) has produced its first of two reports on simplifying the Capital Gains Tax (CGT) system.
At 135 pages the report certainly makes the most of the broad remit that Chancellor Rishi Sunak provided back in July. A total of 11 recommendations are made covering tax rates, reliefs and exemptions and the interaction of CGT with Income Tax and Inheritance Tax.
Indeed, it was the scope of the review that caused concern among professional bodies like the ICAEW and CIOT who feared the OTS would overstep its remit. Unfortunately, the contents of the report do not appear to allay those concerns as parts stray away from the simplification of a system and into the making of tax policy for a ‘fairer’ one.
It seems this is a position the OTS are comfortable with as Kathryn Cearns, the current Chair, notes: “This report breaks new ground for the OTS, setting out a framework of policy choice about the design of the tax for government to consider.”
The title of the report ‘Simplifying by design’ is of course the obvious signal of intent; if the system itself cannot be simplified, let’s redesign it. But is the system beyond saving and what is at stake?
What’s at stake?
The simple answer is more tax revenue at a time of massively increased government borrowing and expenditure.
CGT is an important tax for the Exchequer, but one that is relatively small by comparison to the big three of Income Tax, National Insurance and VAT. As recorded in the OTS report, 265,000 people paid £8.3 billion of CGT in 2017/18 compared to 32 million people paying £180 billion of Income Tax in the same year.
Unlike the big three, though, CGT is not ‘protected’ by Boris Johnson’s Guarantee under which he has promised to not raise the rates of Income Tax, National Insurance and VAT. In addition, any changes to CGT would only affect a minority of the population.
In making its recommendations, the OTS points to theoretical increases in the CGT tax take of:
£14 billion from the alignment of CGT and Income Tax rates.
£480 million if the annual exempt amount were reduced to £6,000.
Between £470 million and £900 million from replacing the CGT uplift on death with a holdover relief.
So, what about those recommendations.
The OTS recommendations
The recommendations fall across four areas of CGT.
Rates and boundaries
1. More closely align CGT rates with Income Tax rates.
2. With aligned tax rates, consider: (i) the reintroduction of relief for inflationary gains; (ii) review the use of family investment companies and (iii) allow for the more flexible use of capital losses.
3. In the absence of aligned tax rates, consider reducing the number of CGT rates from four to two.
4. Review employee share ownership schemes and consider the taxation of retained earnings within smaller, owner-managed businesses on sale or liquidation.
Annual Exempt Amount
5. Consider reducing the level of the annual exempt amount to somewhere between £2,000 and £4,000.
6. Link a reduction of the annual exempt amount with: (i) a reform of the chattels exemption; (ii) improve and formalise the CGT ‘real time service’ and (iii) utilise investment managers and others to help report CGT.
Capital transfers
7. Where a relief or exemption from Inheritance Tax applies, remove the automatic CGT uplift on death and instead treat the recipients as acquiring the assets at the historic base cost of the person who has died.
8. Consider applying the above recommendation for Inheritance Tax as a whole.
9. If the uplift is removed, consider rebasing assets to the year 2000 and extending Gift Holdover Relief.
Reliefs and losses
10. Replace Business Asset Disposal Relief with one more focused on retirement.
11. Abolish Investors’ Relief.
The full report can be found here.
Is the current system that broken?
The ICAEW don’t think so, and I am inclined to agree for the same reasons.
Would a new system be simpler?
Whilst the OTS recommendations propose simplification, they come with their own complications, such as:
The reintroduction of some form of inflationary relief for gains has been tried before. Indexation allowance for individuals and subsequently taper relief were both abolished for a reason.
The OTS recognise that lowering the annual exemption would make more chattels transactions subject to CGT. Chattels seldom simplify matters for anyone, mainly because few people know what they are.
Rebasing assets and keeping historical records for holdover relief claims…good luck!
If the commissioning of the OTS report was a sounding out exercise by Rishi Sunak, it will certainly be interesting to see which of these recommendations make it into the next Budget.
In the meantime, we await the second report due early next year that will deal with technical and administrative CGT issues in more detail.
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