In July 2020 the Chancellor asked the office of tax simplification (OTS) to carry out a review of Capital Gains Tax to ‘Identify opportunities relating to administrative and technical issues as well as areas where present rules can distort behaviour or do not meet their policy intent’.
The OTS came up with various recommendations and requested comments on their report. Clearly the Chancellor could just adopt their recommendations as it would increase the take for Capital Gains Tax, as Capital Gains tax has always generated a small amount of tax as compared with Income Tax.
So here are some of the recommendations:
- Consider more closely aligning Capital Gains Tax rates with Income Tax (higher Capital Gains Tax rate is 28% whilst income tax is 45%)
- Consider addressing boundary issues between Capital Gains and Income Tax (could just add capital gains tax to be part of the income tax liability).
- Consider reintroducing a form of relief for inflationary gains (there used to be a relief for inflationary gains but it was removed to simplify capital gains tax when the rates were reduced – this is welcome news if rates increase).
- Consider the interactions with the tax position of companies (this is about accumulated profits as a company – so could change this part of a gain and treat as if it was a dividend)
- Consider allowing a more flexible use of capital losses (currently most capital losses can only be set against other capital gains, whilst welcome this is likely to be adopted only if gains are taxed at income tax rates)
- Consider whether employees and owner – managers’ rewards from personal labour (rather than investments) are treated considerably and taxing these rewards at income rates.
- If governments’ policy is that the annual exemption amount is intended mainly to operate as an administrative de minimis, it should consider reducing its level (current £12,300, OTS are suggesting £5000 – this will result in many individuals who use their annual allowance as part of their investment portfolio planning suffering more tax)
- If the allowance is reduced then it is suggested the chattels exemption will need updating (this is the relief on personal affects)
The OTS then turned to major items for business.
First is the link between Inheritance Tax and Capital Gains Tax.
- Where relief or exemption from Inheritance Tax applies, the Government should consider removing the Capital Gains uplift on death, and instead provide that the recipient is treated as acquiring the assets at the historic base cost of the person who has died. (under current rules a trading business normally qualifies for business property relief, so on the owner’s death there is no Inheritance Tax whilst the beneficiary who receives at the market value at the date of death for Capital Gains Tax purposes). This would create a significant additional tax liability for most second or third generation business owners.
But the OTS went further:
- In Addition. The government should consider removing the Capital Gains uplift on death more widely, and instead provide that the person inheriting the asset is treated as acquiring the assets at the historic base cost of the person who died. This could create some issues especially if the base cost of the asset was £1 and now worth £100, Inheritance Tax due at 40% would be £40. The recipient then has to pay the Inheritance Tax so sells the asset to pay this tax which creates a Capital Gain (assuming taxed at higher income tax rate and no Capital Gains exemption) a further £45 is due leaving the recipient £15 left. The OTS did recommend that if the Capital Gains Tax uplift is removed the Government should consider rebasing of all assets, perhaps to the year 2000 and improving gift holdover relief.
Finally, the Chancellor substantially changed entrepreneurs’ relief in the last budget reducing the relief from £10 million to £1 million per person. The OTS have gone further and recommended and relief should only apply on a retirement and should completely abolish another relief called Investors Relief. They proposed that the retirement relief should only apply if the shareholding was 25% or above currently the level is 5% or above.
The above is going to provide uncertainty in market. Some individuals may will to sell assets before the next budget (likely to be in March 2021) as the OTS recommendations in the main will raise the amount of Capital Gains Tax to be collected.
The next step
For further information on Capital Gains Tax, please contact Clive Gawthorpe or your usual UHY adviser.