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.