Office Of Tax Simplification (OTS) Publishes First Capital Gains Tax (CGT) Report

Office Of Tax Simplification (OTS) Publishes First Capital Gains Tax (CGT) Report

The Office of Tax Simplification (OTS) has published its first report as part of the capital gains tax (CGT) review shown at the chancellor’s request.   This to help ‘identify opportunities relating to administrative and technical issues as well as areas where the present rules can distort behaviour or do not meet their policy intent’.

The report shows 4 areas that recommends the following 11 simplifications.  These will be used to smooth out distortions, improve administrative efficiency and make the tax easier to understand and predict.

1. Rates and boundaries:

  • Consideration should be given to more closely aligning CGT rates with income tax rates, and the boundaries between the two taxes should be analysed (particularly looking at the interaction of taxes in relation to share-based remuneration and the accumulation of retained earnings in smaller owner-managed companies).
  • If the rates are to be more closely aligned, the government should consider reintroducing a form of relief for inflationary gains, address any interactions with the tax position of companies, and consider allowing a more flexible use of capital losses.
  • If there remains a disparity between CGT and income tax rates, and the government wishes to make tax liabilities easier to understand and predict, it should consider reducing the number of CGT rates and the extent to which liabilities depend on the level of a taxpayer’s income.
  • In relation to CGT/IT boundary issues, the government should look closely at whether employees and owner managers are treated consistently in terms of remuneration from personal labour, and should consider taxing share-based rewards arising from employment and accumulated retained earnings in smaller companies at income tax rates.

2. Annual exempt amount:

  • If the intention is to operate the AEA as an administrative de minimis, the government should consider reducing its level.
  • Any reduction should be considered together with reform of the chattels exemption (introducing a broader exemption for personal effects), formalising the real-time CGT service (linking returns up with the personal tax account), and potentially requiring investment managers to report CGT information to taxpayers and HMRC to make compliance easier for individuals.

3. Interaction with lifetime gifts and inheritance tax:

  • Where an IHT exemption or relief applies, the government should consider removing the CGT uplift on death, and treat the recipient as acquiring the asset at the historic base cost of the person who has died.
  • Consideration should be given to applying the above principle more widely (replacing capital gains uplift on death with base cost).
  • If the capital gains uplift were to be removed more widely, the government should also consider a rebasing of all assets (the OTS suggests to the year 2000) and extending gift holdover to a broader range of assets.

4. Business reliefs:

  • The OTS suggests the Government should consider replacing business asset disposal relief (formerly entrepreneurs’ relief) with a relief more focused on retirement; and abolish investors’ relief.
  • This is the first of two reports on CGT by the OTS. The second will follow in early 2021 and will focus on technical and administrative issues.

 

Inheritance and Capital Gains Tax Strategies

Inheritance and Capital Gains Tax Strategies

This client came to us following a recommendation by their accountant for strategic inheritance tax and capital gains tax planning. The client had accumulated a number of properties over time and wished to pass these onto their children. There is usually friction between inheritance tax and capital gains tax whereby if the assets are transferred during a lifetime, there is a capital gains tax charge. In contrast, if the assets are left in the estate until death, there is an inheritance tax charge at 40%. The other main issue with leaving assets (especially property) within the estate is that the increase in value over time meaning the inheritance tax liability increases over time. We were able to propose a unique tax planning structure which reduced our client’s estate and therefore the inheritance tax liability. At the same time, the tax planning allowed for no capital gains tax to be paid.

Our analysis: Before coming to see us this client had taken advice on setting up a number of trusts which in our view over complicated matters and ultimately ended with a high tax liability than was required. 

Hashmi

The case of Hashmi related to the private residence relief regarding capital gains tax.  The case was lost in the First-Tier Tribunal Tax because the Appellant had tried to claim the PRR on three properties that had been sold on fairly quickly after purchase.  The tribunal found that they had not seen anything that suggested sufficient evidence so show, some degree of permanence, some degree of continuity or some expectation of continuity in the property and show that the person claiming the relief had lived in the property.

This is very important for the relief to be claimed.  To be able to demonstrate that the property had been a home.  Evidence such as utility bills and TV licences are all the kinds of evidence that demonstrate permanence and continuity, as the court required in this case. 

Tax implications on gifting property before death

Tax implications on gifting property before death

This unusual case came to us following the clients’ father passing away. The deceased father had gifted some properties to the children two years before death following advice on signing a retrospective deed of trust. We were asked to check whether the retrospective deed of trust stood for tax law purposes. Having reviewed the case we concluded that advice received was incorrect and the transfers to children were chargeable transfers for capital gains tax purposes. There was a substantial capital gains tax liability on the transfers that had not been reported but was now due on the estate of the deceased father. Unfortunately the father passed away within two years of gifting the properties which meant that these would be included in his estate for inheritance tax purposes at full value and that taper relief would not be available. To make matters even worse, if the children were to sell a property to pay for the late father’s capital gains and inheritance tax, they would first pay capital gains tax on the disposal of the property. A disclosure needed to be made by the executors of the late father’s estate in relation to the unpaid capital gains tax liabilities. There were easy steps that could have been taken to avoid all the tax charges had advice been taken from a specialist tax firm.

Our analysis: This was one of the worst cases of bad tax advice we have seen and we felt very sorry for our clients who were having to suffer the implications. When transferring properties to children or relatives, it is imperative that tax advice is taken from a firm that specializes in tax law and in writing to avoid small and easy to handle issues becoming out of control.

Churchill Tax Advisers Help IHT Planning For Indian Born Clients

This query related to inheritance tax planning and came from an Indian born high net worth individual living in the UK for over 30 years. The client had a substantial estate in India and the inheritance tax position from UK perspective was not clear on these assets. Having researched the issue, we were able to advise that the deemed domiciled rules do not apply for individuals born in India and three other countries. This meant that provided certain conditions are met, there would not be any UK inheritance tax on assets based in India. The interesting part is that there is no inheritance tax in India so effectively (with careful planning), the Indian based assets can be passed to the next generation without any inheritance tax. This particular law is not covered by UK’s tax legislation and the source had to be verified to a double tax treaty with India from almost 60 years ago! This can open doors for tax planning for many wealthy Indian born individuals that have been living in the UK for some time. There are some traps for capital gains tax but once again with careful planning, this can also be avoided.

Churchill Tax Advisers Advise On Structuring For A Large Development

This case came to us from a firm of accountants in London and involved a large property development project. The issues at hand were how to mitigate potential inheritance tax, capital gains tax and income tax implications for the owners. Recent changes in the tax legislation on using structures such as limited liability partnerships created further complexities. We were able to put together a structure, in light of the new legislation, whereby our clients could achieve lower income tax liabilities as well as capital gains tax and flexibility to mitigate potential inheritance tax liabilities. By seeking specialist advice prior to the commencement of the development project our client can have benefits in the short and long term. Had this advice not been taken at this stage, there could have been significant tax implications for making any alterations due to the rise in the value of the property subsequent to the development work.