Richard Douglas-Home: First recommendations made for the Chancellor in Capital Gains Tax review
Richard Douglas-Home looks at proposed changes to the capital gains tax regime.
The Office of Tax Simplification (OTS) is an independent office of the Treasury, set up in 2010 to provide advice to the government on simplifying the UK tax system. It will produce reports either on its own initiative or at the request of the Chancellor.
It is perhaps telling that in the midst of a worldwide pandemic and a potential economic crisis, the Chancellor in July felt it was time to ask the OTS to carry out a review of capital gains tax (CGT). This project has clearly been given some priority and its recommendations ought to be viewed in that light.
At present, CGT is charged at 28 per cent on gains on disposals of residential property and at 20 per cent (or 18 per cent and 10 per cent respectively for lower rate taxpayers) on all other assets. The taxable gain is the difference between sale price, or market value if the disposal is by gift, and the base cost.
Although a gift creates a tax charge, hold-over relief is available in certain circumstances to allow the gains to pass with the asset, rather than being taxed on the donor. Agricultural and trading assets generally qualify for hold-over relief in their own right. Other assets do not qualify unless the gift is to a trust. When assets pass on death, normally the gains attaching to those assets are washed out, and the beneficiary takes the date of death value as their new base cost. The OTS’S first report on CGT contains the following key findings and options for change.
Tax Rates: It notes that the disparity in rates of income tax (up to 46 per cent in Scotland) and CGT (20 per cent or 28 per cent for higher rate taxpayers) distorts decision-making and creates an incentive to re-characterise income as capital gains. To address these issues, it is suggested income tax and CGT rates should be more closely aligned. If CGT rates are to rise, it is suggested that some form of indexing of base costs should be re-introduced, to offset the impacts of inflation on asset values.
Annual Exempt Amount: A taxpayer can each year realise up to £12,300 of gains CGT free. The OTS suggests this is too high, and should be reduced, perhaps to £3,000-£5,000. If that happened, it is proposed that the chattels relief, which currently exempts items worth £6,000 or less from tax, should be increased.
Interaction with Inheritance Tax (IHT): It is noted that current rules incentivise taxpayers to retain assets, particularly IHTrelieved assets such as farms and businesses, until death, to obtain the CGT washout of gains. The report suggests this may not be best for businesses, individuals or the economy. In the OTS’S second Inheritance Tax Report. it recommended that where assets pass on death Iht-free, the CGT death uplift should not apply. Instead, the beneficiary would inherit the deceased’s original base cost.
The OTS CGT Report goes further and proposes the death uplift is abolished. If that happened, it is suggested the base cost of assets held for some time should be rebased to 2000. Actually, rebasing from 1982 is long overdue, so this would be a welcome change, but unlikely to be favourable to taxpayers if it comes at the cost of losing the death uplift. It is also suggested consideration should be given to extending gift holdover relief, so it applies to all assets automatically, not just agricultural and business assets. This would be a huge help for future succession planning.
Business Reliefs: Entrepreneurs’ Relief was recently replaced by a watered-down version, Business Asset Disposal Relief, which shelters up to £1m of gains on qualifying disposals of trading company shares or business interests. The OTS suggests this relief is mis-targeted and should be replaced by something akin to the old retirement relief.
If adopted, the proposals on CGT would significantly change the current approach to succession and tax planning.
Richard Douglas-Home is a senior associate at Turcan Connell