Following the Chancellor’s request for the Office of Tax Simplification (“OTS”) to review the CGT regime in the Summer, the OTS have published their initial findings and recommendations for reform of the CGT regime.
Whilst the proposals are only recommendations at this point (and indeed the government has yet to enact any of the recommendations by the earlier OTS review of Inheritance Tax), they would potentially have wide reaching implications for individuals disposing of assets should the recommendations be adopted. Unsurprisingly, the report and associated press coverage has caused some concern for taxpayers on the future shape of the CGT regime and how this may impact on their tax bills in the future.
For those of you who do not have the time or inclination to read through the 135 page report, some of the recommendations are as follows:
- Closer alignment of CGT rates with income tax rates or addressing the “boundary issues” between CGT and income tax, presumably intended to prevent taxpayers from trying to turn income into capital gains;
- A new relief for inflation in the value of assets;
- Changes to the taxation of share based rewards and accumulated earnings;
- Reduction in the level of the CGT annual exemption (currently £12,300), possibly to between £2,000 and £4,000;
- Scrap the existing CGT uplift on assets on death, particularly for those which qualify for IHT reliefs. Interestingly the OTS suggested a similar measure in their review of the IHT regime. This could potentially go hand in hand with a rebasing of assets, and the possible extension of CGT relief on gifts to cover a wider range of assets;
- Replacement of Business Asset Disposal Relief (formally Entrepreneur’s Relief) with a relief more focused on retirement;
- Scrap Investors’ Relief;
- Reform of the administration of CGT, including more real time reporting and payment of CGT.
The proposed CGT changes will predominantly target higher earners, particularly those with investments such as property and stocks and shares. For instance, the halving of the CGT annual exemption is likely to double the number of taxpayers exposed to CGT and lead to a corresponding increase in filing obligations.
Given the current economic climate, it is becoming increasingly likely that the Chancellor will seek to raise taxes at the next Budget (likely to be in March 2021) to deal with the country’s increasing debt. However, CGT represents a lower proportion of the overall tax take in comparison to income tax, national insurance and VAT and there is some doubt as how much additional tax revenue increases to CGT would raise in practice. Furthermore, there is likely to be opposition from both the business community and Conservative MPs, particularly to policies considered to be counterintuitive to promoting investment in the struggling UK economy, such as scrapping reliefs for business disposals. We are working with our clients to help them manage the potential impact of these changes. Please contact us if you would like to discuss how we can help.