The Office of Tax Simplification (OTS) is an independent advisor to the UK government which was set up in 2010 to provide advice and recommendations to the chancellor on simplifying the tax system.
In the grip of the COVID-19 pandemic in July 2020, the chancellor requested that the OTS review capital gains tax (CGT) 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’. On 11 November 2020 the OTS published its first report which focused on the policy design and principles underpinning CGT. It included some potentially significant recommendations such as aligning the rate of CGT with income tax and removing the tax-free uplift on death.
The OTS published its second report on CGT, Simplifying practical, technical and administrative issues, on 20 May 2021. This report focuses more on technical and administrative issues.
The report makes 14 recommendations which cover a variety of areas including the way in which capital gains are reported, moving home and getting a divorce or separation. We have highlighted some of the key points below:
(a) Method of reporting and paying CGT
At present, a capital gain can be reported in three different ways (ie a traditional self-assessment return and under two relatively new services for reporting disposals of residential properties). The OTS recommends integrating these services into a ‘single customer account’ with the idea being that having a single account will reduce the administrative burden on taxpayers.
(b) UK property tax return
Where a property eligible to CGT is sold, a UK property tax return must be filed within 30 days of settlement. The 30-day deadline can be a tight deadline to achieve and the OTS recommends that this deadline is extended to 60 days. In addition, to increase awareness of the rules, the OTS suggests that that estate agents and conveyancers should distribute HMRC-provided materials to clients about the required tax return.
Shares are ‘pooled’ where additional shares in the same company are acquired over a period of time at different prices. Where a part of the shareholding is sold, the base cost of the shares disposed of is calculated on the average purchase price of the entire shareholding. The need to ‘pool’ shares becomes more complicated where a taxpayer has multiple portfolios which are held by investment managers, as any shares in the same company still need to be pooled together.
The OTS recommends that if a taxpayer is holding the same share or unit in more than one portfolio then the taxpayer should be treated as if the holdings were in separate share pools to reduce the chance of any mistakes being made when reporting gains/losses.
(d) Principal private residence relief (PPR)
PPR provides CGT relief to a taxpayer’s main home and also its gardens/ground (within certain limits). It is a hugely important relief and is utilised by millions of taxpayers every year. However, the OTS notes that the rules can produce ‘unexpected and distortionary outcomes’. It cites the example of a new house built in a taxpayer’s garden and the different ways PPR applies depending on whether the taxpayer sells the garden to a developer or instead builds a new home that he or she will then move to. The OTS recommends that the rules are amended to ensure uniform treatment.
Also, the OTS highlights the practical problems involved with the PPR nomination system where a taxpayer owns more than one home, and it has suggested areas for improvement.
(e) Divorce and separation
Spouses or civil partners can pass assets between themselves without triggering a CGT charge as the new owner receives the asset at the same base cost as the previous owner. If the couple decide to separate permanently, they are still able to pass assets between themselves without triggering a CGT charge, but only if the transfer is made in the same tax year as the separation. This can lead to arbitrary outcomes depending at what point in the tax year a couple actually separate. The OTS recommends expanding this window for no gain/no loss transfers to the later of: (1) the end of the tax year at least two years after the separation event; or (2) any reasonable time set for the transfer of assets in accordance with a court-approved financial agreement.
In addition to the changes outlined above, the OTS recommends that HMRC improves its published guidance in a number of areas as well as improving public awareness of the tax rules (eg in relation to UK property tax returns).
As it concentrates on practical and administrative issues, none of the recommendations in the OTS’s most recent report are particularly radical. Having said that, these would be welcome changes, especially those relating to transfers on divorce, which has been an area that has caused unnecessary complications for years.