The Office of Tax Simplification (OTS) has published a report dedicated to capital gains tax (CGT) in a bid to set out a range of proposals for the government.
It comes several months after chancellor Rishi Sunak ordered the OTS to undertake a review of the country’s CGT rules, as rumours suggest he wants to make changes within the next budget to pay for coronavirus debts.
Sunak wanted the OTS to “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 OTS’ ‘Simplifying by Design’ report highlighted ways CGT can “distort behaviour” and revealed a range of areas in which the tax is “counter-intuitive and creates odd incentives”.
Some respondents in the report argued that CGT is a barrier to economic growth, others said it is a barrier to a more equitable society.
‘Easier to understand’
The report sets out a range of policy choices within which the government could consider simplifying the design of CGT, to “smooth out bigger picture distortions”, “improve administrative efficiency” and make the “tax easier to understand and predict”.
This can be done across four interlinked areas: rates and boundaries, annual exempt amount, interaction with lifetime gifts and inheritance tax, and business reliefs.
The OTS found the disparity in rates between CGT and income tax “can distort business and family decision-making and creates an incentive for taxpayers to arrange their affairs in ways that effectively re-characterise income as capital gains”.
Additionally, the relatively high level of the annual exempt amount can distort investment decisions.
In the 2017-18 tax year, around 50,000 people reported net gains just below the threshold. If the government’s policy is that the annual exempt amount is “intended mainly to operate as an administrative de minimis, it should consider reducing its level”, the OTS said.
CGT incentivises owners to transfer business and personal assets to others on death rather than during their lifetime. It found that this may not be best for the “business, the individuals or families involved, or the wider economy”.
The report said the government should “look more widely at removing the capital gains uplift on death, and instead provide that the person inheriting the asset is treated as acquiring the assets at the historic base cost of the person who has died”.
Suggestions
Bill Dodwell, tax director at the OTS, said: “If the government considers the simplification priority is to reduce distortions to behaviour, it should consider either more closely aligning CGT rates with income tax rates, or addressing boundary issues as between CGT and income tax. The report covers a range of other issues relevant to each policy choice, including relief for inflation.
“If the government were to reduce the annual exempt amount, it should do so in conjunction with considering reforms to the current chattels exemption and improving the real time capital gain service, including linking these returns to the personal tax account.
“It should also explore requiring investment managers and others to report CGT information to taxpayers and HM Revenue & Customs, to make tax compliance easier for individuals.
“If the government were to look more widely at removing the capital gains uplift on death, it should consider a rebasing of all assets, perhaps to the year 2000, and consider extending gift holdover relief to a broader range of assets, making it easier for individuals to give assets away during their lifetime.”
Dodwell added that the “government should abolish investors relief”.
Use allowances now
Rachael Griffin, tax and financial planning expert at Quilter, added: “Chunky reports from the government aren’t known to be produced at speed unless there is a real requirement.
“The OTS itself acknowledges the consultation has been produced in a shorter timeframe and this hints that change to CGT will be on the cards, as the chancellor looks to counteract the escalating deficit caused by the pandemic.
“The OTS has suggested a package of reforms, some of which are tweaks around the edges that will be relatively quick wins and some which will cause a bit of a stir.
“The prospect of bringing CGT in line with income tax has been touted for some time and so that is relatively unsurprising, although it would lead to a significant rise in tax paid by those subject to CGT. And simplification is again at the heart of the OTS’ report, which suggests that there be two rates rather than four.
“Other proposals, such as scrapping CGT uplift on death, have far reaching consequences and need to be considered carefully. One of the biggest challenges of tinkering with the CGT system is its interaction with several other parts of the tax system, in particular inheritance tax, so many changes can be complex and have knock-on consequences for other parts of the tax system.
“In general, the message is clear from the government and the OTS. Use your allowances now or lose them. Changes are on the horizon and while it is not suitable for everyone to change their financial plans because of mere policy speculation, it is worth your while to review in light of what will inevitable be a more harsh tax environment,” she added.
