Capital Gains Tax reform – what you need to know

We are nearing the close of a year which has witnessed unprecedented Government expenditure so it was perhaps inevitable then that, in light of the costs of Covid for the treasury, the Chancellor's thoughts would shortly turn to tax reform.  To this end the publication of the Office of Tax Simplification (OTS) review of Capital Gains Tax (CGT) could not have been more timely.  Its remit includes rates and thresholds, reliefs and interaction with Inheritance Tax.  CGT does not at present result in significant tax take in comparison with Income Tax, but with some simple amendment could be used to increase tax take significantly on those who hold capital assets and are therefore perceived as the most able to afford it.

Rates

CGT rates are low by UK standards at present, although there are a number of special rates which have been introduced piecemeal, making the current system cumbersome:

The report explores the possibility of returning to a system whereby gains are taxed at the same rates as income, meaning that gain could be taxed at rates of up to 45%.  The report considers and ultimately rejects a reintroduction of some form of taper relief but does not rule out the use of some kind of indexation or 'rate of return' allowance.  In addition, more flexibility regarding the use of losses could be offered.  The change in rates, it is asserted, would do away with artificial behaviour intended to convert income into gain and encourage commerciality within a more neutral tax environment.

Annual Exempt Amount

The Annual Exempt Amount for tax year 2020-21 is £12,300. This fulfils several purposes:

1. Reduces the number of people who need to submit CGT information;
2. It is a broader more substantive relief, in comparison to Income Tax personal allowance; and
3. It is a rough and ready way to compensate for inflation.

The proposal is to reduce the AEA to a figure between £2,000 and £4,000.  Recognising that this will increase the compliance burden for many individuals the OTS suggests that any change should be accompanied by amendments to the compliance system, perhaps allowing for reporting by investment advisors or a standalone CGT return. 

Uplift on death

The current method can lead to situations where either one, both or neither of the taxes arise. This is due to the combined effects of Inheritance Tax exemptions and reliefs and the CGT exemption on death, coupled with the fact the those inheriting assets do so at their market value, this is known as the 'death uplift'.

The OTS recommends that a taxpayer should not benefit from both an Inheritance Tax exemption and a CGT death uplift. A suggested alternative is an approach known as 'no gain no loss' where the recipient is treated as acquiring the assets at the historic base cost of the person who has died.

Recognising that here is a possibility of an administrative challenge in calculating historic base costs, the OTS suggests that this measure could be accompanied by a rebasing, probably using the year 2000 by which time Land Registry records would have been sufficiently complete to facilitate any valuation exercise.

Reliefs

There has historically been some form of business asset disposal relief from CGT and the current incarnation of this is Entrepreneurs' Relief, which can bring the rate of CGT down to 10%.  The OTS recommends restricting the former as follows:

• Increasing the minimum shareholding to 25%, to relief only goes to owner-managers rather than a broader class of employees;
• Increasing the holding period to 10 years, this is to ensure the relief only goes to those who have built up the business; and
• Reintroducing an age limit, suggested to be linked with the age limits in pension freedoms, to reflect retirement.

In addition relief for investors could be removed entirely.  This is likely to be an area of concern for many shareholders.

In summary

Coming hot on the heels of existing IHT reform proposals and amidst the growing threat of a UK Wealth Tax, this report only adds to a growing sense of uncertainty for taxpayers and Individuals will naturally be concerned about their future exposure to CGT going forward.  A combination of higher rates and restricted reliefs and allowance will result in a greater liability for some 390,000 individuals per annum and if you are one of these, you may wish to explore ways to protect your position. 

In terms of timescales, we would urge caution.  A second report is expected next year which will provide further detail, particularly in relation to compliance, and significant changes are therefore unlikely to be introduced immediately.  Where gifting or disposal is already in contemplation these could be accelerated and Foot Anstey can assist with any such planning, but there will always be wider commercial factors that must be taken into account alongside any tax planning.  In due course, it may be possible to identify and take active steps to 'rebase' assets standing at a significant gain but this should always be done as part of a wider tax and succession planning exercise.