The Office for Tax Simplification (OTS) has published a second report into the streamlining of the capital gains tax (CGT) system in the UK.
The first report in November 2020 recommended aligning CGT rates to income tax, which meant a significant increase in the sum investors would need to pay.
The second report, however, focused on 14 changes that should be implemented in several areas of CGT.
The OTS has suggested the government change the “no gain no loss” regime for spouses or civil partners looking to get a divorce.
At the moment, couples can transfer assets between each other “without triggering an immediate CGT charge”, the OTS said, meaning they will only need to pay tax if the receiving spouse decides to sell.
They are also able to keep transferring assets and receive the same treatment of married couples in the same tax year of permanent separation, where the ‘no gain no loss’ regime still applies.
But if such transfers are made in the following tax year, they are treated as “taking place at market value” which could incur in a CGT charge even if no cash exchanged hands, the OTS warned.
‘We should not force couples to stay together’
Hayley Trim, family law partner at Irwin Mitchell, said that the current framework creates a “timings issue” for people getting a divorce.
“For instance, people separating in March only have until 5 April to finalise any transfers between them. It can lead to pretence about when separation took place and, for those in the know, staying together a bit longer in an attempt to avoid the tax problem.”
As a result, the OTS recommended changing the ‘no gain no loss’ system by extending the window on separation to the end of the tax year “at least two years after the separation event”, and to “any reasonable time set for the transfer of assets in accordance with a financial arrangement approved by a court or equivalent process in Scotland”.
Trim added: “If implemented, this change could remove an additional pressure on separating couples and allow them more time to negotiate appropriate financial settlements.
“It would reflect the reality of people’s lives because the divorce process takes on average over a year; requiring couples to have everything sorted out by the 5 April after they separate is simply not realistic in many cases. It would also remove the need to take tax advice in more straightforward cases.
“If the government is serious about simplifying tax and not encouraging people to change their behaviour because of tax, then this proposal should certainly be followed – we shouldn’t force people to stay together until 6 April just to avoid tax.”
Home buyers
Another change put forward in the second report would affect people buying a property.
Currently, buyers have 30 days to report and pay for a tax return on a UK property and the OTS believes the timeframe should be doubled to 60 days.
Rosie Hooper, chartered financial planner at Quilter, said: “Selling a house is a complicated process and it comes with lots of fees and charges to solicitors, surveyors, estate agents and others.
“Extending the deadline to pay any CGT on a property sale will provide homeowners with a bit respite and ensure they can get the finances in order to pay the charge and arrange any reinvestment.”
Awareness
The OTS also recommended the digitalisation of tax reporting and the formalisation of a ‘real time’ CGT service as a standalone tax return to make things simpler for consumers.
But Laith Khalaf, financial analyst at AJ Bell, said that such a system would require people to pay their charges earlier, which most likely isn’t a priority for many taxpayers.
He added: “It’s good that the OTS is trying to raise awareness, iron out wrinkles, and simplify capital gains calculations for investors, but it remains a fiendishly complex tax. The saving grace is really the limited number of people who pay it, thanks to a relatively generous annual allowance, and the availability of tax shelters like Isas and Sipps.
“The OTS actually thinks the annual allowance should be cut drastically, which would leave many more taxpayers on the hook for CGT and having to get their heads round all the complexities involved. So far, the government hasn’t adopted that recommendation, much to the relief of investors up and down the country.
“The OTS may well feel the chancellor has left them hanging after failing to enact their previous recommendations to increase CGT. However, these latest proposals are more technical than ideological, so will not be as controversial to enact.”
‘Far too complex’
Despite the recommendations in the latest report, tax advisory firm Blick Rothenberg still believes the whole CGT system needs a major overhaul.
Nimesh Shah, Blick Rothenberg chief executive, said: “Whilst the OTS’ latest report suggests a number of welcome improvements, these are relatively minor, and the report does not tackle the major issue that the overall CGT regime is far too complex and requires a complete overhaul if it is genuinely going to be fit for purpose.
“At its basic level, there are five different rates of CGT that could apply to a transaction, and this is not addressed anywhere.
“The latest OTS report is a marked improvement on the November 2020 submission, as it offers a number of areas where the regime could be genuinely simplified. The first report from the OTS contained quite radical proposals to change the CGT regime and align the rates to income tax, which was a policy direction rather than simplification, and the proposals could have actually led to more complexity.”
But both Shah and AJ Bell’s Khalaf believe that there is no certainty CGT rates won’t be raised in the future.
Khalaf said: “Investors shouldn’t entirely discount the potential for changes to CGT further down the road though, and so should still make use of their annual Isa allowance to shelter as much as possible from the taxman.
“Current CGT rates do look low compared to income tax rates, and if the chancellor’s plans to balance the books get blown off course, he’ll start to look for new ways to increase the tax take.”
