Last week the UK government held its Tax Administration and Maintenance Day. As part of this, it provided a response to the recommendations previously put forward by the Office of Tax Simplification (OTS) to restructure the way inheritance tax (IHT) and capital gains tax (CGT) were applied.
The OTS’s IHT recommendations had included wide-ranging changes to reliefs on agricultural and business property, as well as simplifying exemptions on lifetime gifting. However, last week the Treasury announced that it has decided not to implement any of these recommendations but will bear the OTS views in mind if it does consider reform of IHT in the future.
The OTS had recommended several significant changes to CGT, such as aligning the rate of CGT with income tax, and abolishing the CGT free uplift on death, in certain circumstances. The Treasury has rejected these proposals. However, the Treasury has advised that it will look to implement several changes to CGT recommended by the OTS, with a view to simplifying matters for the taxpayer. Five further CGT recommendations are being considered further. The majority of these are administrative or technical.
The following areas of CGT are likely to see changes:
- The ‘no gain no loss’ window which applies on separation and divorce is likely to be extended so that it does not only apply for the year of separation. The OTS had previously suggested that this was extended to the later of (a) the end of the tax year at least two years after separation, or (b) any reasonable time set for the transfer of assets in accordance with a financial agreement approved by a court (or equivalent processes in Scotland).
- Rollover relief in the context of compulsory purchase orders, limited liability partnerships and Scottish partnerships.
- The enterprise investment scheme.
The Treasury also confirmed that HMRC’s written guidance on more complex CGT rules (eg the application of business asset disposal relief) will be updated to ensure they are more accessible and of a higher quality.
One area the Treasury will not overhaul (for the time being) is principal residence relief (PRR), which allows individuals to sell their only or main residence without incurring CGT. The OTS had suggested that the rule which allows an individual to claim PRR when selling a part of their garden should be adjusted. This rule could apply when selling part of the garden to a property developer. However, PRR may not be available in full if an individual elected to build a new house for their own occupation on the garden land. The OTS had remarked this was an ‘unexpected and distortionary outcome’.
For the time being, therefore, the main change to CGT rules to be aware of in the 2021/22 tax year is the extension of the payment deadline from 30 days to 60 days when disposing a UK land and property, which was announced by the Chancellor in the autumn budget, and was based on an OTS recommendation.