The Office of Tax Simplification
The Office of Tax Simplification is an independent office of the Treasury, set up in 2010 to provide advice to the Government on simplifying the UK tax system. It will produce reports either on its own initiative or at the request of the Chancellor. It is perhaps telling that in the midst of a worldwide pandemic and a potential economic crisis, the Chancellor in July felt that now was the time to ask the OTS to carry out a review of CGT. It is also notable that the OTS were able to produce their first report, after “extensive consultation”, on 11th November. This is a remarkably quick turnaround time for any Government agency, let alone one working through lockdown conditions. This project has clearly been given some priority and its recommendations ought to be viewed in that light.
At present, CGT is charged at 28% on gains on disposals of residential property, and at 20% (or 10% for lower rate tax payers) on all other assets. The taxable gain is the difference between sale price, or market value if the disposal is by gift, and the base cost. The base cost is the acquisition value or, if held before 1982, the March 1982 market value. Allowable expenditure can be deducted in calculating the taxable gain.
Although a gift creates a tax charge, hold-over relief is available in certain circumstances to allow the gains to pass with the asset, rather than being taxed on the gift. The gains are then only taxed if or when the done subsequently disposes of the asset. Agricultural and trading assets generally qualify for hold-over relief in their own right. Other assets do not qualify unless the gift is to a trust. Certain assets are exempt from tax, in particular the taxpayer’s main residence.
When assets pass on death, normally the gains attaching to those assets are washed out, and the beneficiary takes the date of death value as their new base cost.
The OTS’s Recommendations
The OTS’s first report on CGT contains the following key findings and options for change:-
(a) Tax Rates
It is noted that the disparity in rates of Income Tax (up to 46% in Scotland) and CGT (20% or 28% for higher rate tax payers) distorts business decision making and creates an incentive to re-characterise income as capital gains. To address these issues, it is suggested that Income Tax and CGT rates should be more closely aligned.
If CGT rates are to rise, it is suggested that some form of indexing of base costs should be re-introduced, to offset the impacts of inflation on asset values. This would be a return to the old indexation relief system, which was abolished in 1998.
(b) Annual Exempt Amount
At present, a taxpayer can each year realise up to £12,300 of gains CGT free. The OTS suggests this is too high, and should be reduced, perhaps to £3,000-£5,000. If that were to happen, it is proposed that the chattels relief, which currently exempts items worth £6,000 or less from tax, should be increased.
(c) Interaction with Inheritance Tax (IHT)
It is noted that the current rules incentivise taxpayers to retain assets, particularly IHT relieved assets such as farms and businesses, until death, to obtain the CGT washout of gains. The Report suggests this may not be best for the business, the individuals involved or the economy.
In the OTS’s second Inheritance Tax Report it recommended that where assets pass on death IHT free, because of an exemption, such as surviving spouse exemption, or a relief, such as agricultural or business property relief, the CGT death uplift should not apply. Instead, the beneficiary would inherit the deceased’s original base cost.
The OTS CGT Report goes further and proposes that the death uplift is abolished altogether. If that were to be done, it is suggested that the base cost of assets held for some time should be rebased to 2000. Actually, rebasing from 1982 is long overdue, so this would be a welcome change, but not likely to be favourable to taxpayers if it comes at the cost of losing the death uplift.
It is also suggested that consideration should be given to extending gift hold-over relief, so it applies to all assets automatically, not just to agricultural and business assets. This would certainly be a huge help for future succession planning, especially, for example, for those with large, long held residential property portfolios.
(d) Business Reliefs
Finally, the Report looks at reliefs for business assets. Entrepreneurs’ Relief was recently replaced by a watered down version, Business Asset Disposal Relief, which shelters up to £1m of gains on qualifying disposals of trading company shares or business interests.
The OTS suggests this relief is mis-targeted and should be replaced by something akin to the old retirement relief, but with more restrictive qualifying requirements.
If adopted, the OTS Report proposals on CGT would significantly change the current approach to succession and tax planning. It is important not to look at any one tax is isolation so the contents of the earlier OTS report on Inheritance Tax should also be borne in mind. We are happy to provide advice on all aspects of tax and succession planning.