The latest policy paper from the Office of Tax Simplification (OTS) has caused quite a stir. Published in November ahead of the chancellor’s spending review, the OTS’s report on reforming capital gains tax (CGT), OTS Capital Gains Tax Review: Simplifying by design, called for income and CGT rates to be more closely aligned.
During this review, which was requested by the chancellor, the OTS consulted with a wide range of individuals and businesses, receiving very strong engagement with its call for evidence from individuals, advisers and the general public.
In fact, the OTS received more 1,000 responses to an online survey, 96 emails and submissions from individuals and experts, and held 22 consultation meetings. If nothing else, it was a thorough review process.
Given the wide scope of the review, the OTS will produce two reports. The current report is on the policy design and principles underpinning the tax. The second, which will follow early next year, will explore key technical and administrative issues.
Raising more cash
According to the report, in the 2017-18 tax year, £8.3bn of CGT was paid in relation to £55.4bn of net gains, reported by 265,000 individual UK taxpayers. This compares with £180bn of income tax paid in that tax year by 31.2m individual taxpayers. At a time of ballooning public sector financial expenditure, it would appear that the chancellor is looking very seriously at the proposals to help raise more cash, and at the same time strike a blow for simplification.
‘It is a laudable aim to make the tax system simpler, but it is not always a success and CGT exemplifies this problem well,’ says Nigel May, a tax partner at MHA MacIntyre Hudson. ‘One of the OTS’s recommendations is to align the income and CGT rates in the cause of simplification; however, we have been here before. Ironically, the current differential between income and CGT rates was itself the product of a previous attempt by former chancellor Alistair Darling to simplify the system in 2008.’
It is a laudable aim to make the tax system simpler, but it is not always a success and capital gains tax exemplifies this problem well
Darling’s reforms created the current rates of CGT: the rates depend on the income tax status of the taxpayer and the type of asset disposed of: basic rate taxpayers, who pay 20% on income, only pay 10% on standard capital gains, business asset disposal relief and investor tax relief, a rate that increases to 18% for residential property and carried interest.
Gains for those above the basic rate threshold are taxed at 20%, or 28% for residential property, creating a disparity between tax levels for income (40% or 45% for higher rate payers) and capital gains. Previously, the system worked on lines set down by former chancellor Nigel Lawson in 1988, who removed a flat rate of 30% for capital gains and aligned income and capital gains rates.
Back to taper relief?
May suggests that chancellor Rishi Sunak could do worse than reinstate some aspects of Gordon Brown’s taper relief system introduced when he was chancellor of Tony Blair’s Labour government in 1998. Under this system, relief on CGT increased based on the period of ownership, which meant taxpayers paid less tax the longer they owned an asset.
‘What we should definitely avoid is returning to the pre-taper system of retirement relief, which allowed individuals over-50 making capital gains on certain asset classes to pay a lower rate of CGT [which was in place until 1998],’ May says. ‘In an environment of non-discrimination, we shouldn’t be creating additional tax differentiation based upon age.’
But irrespective of the merits or otherwise of reforms, it would appear that some taxpayers are trying to pre-empt any possible tax hikes by looking to dispose of assets before next spring’s Budget. A number of tax advisers are reporting increased activity among their clients, as they fear a significant increase is on the cards.
As Gary Heynes, RSM UK’s national head of private client, says: ‘Exploring the possibility of accelerating an asset sale prior to 5 April 2021 is probably worthwhile and, if it can be achieved without being less vigorous in the process and obtaining best value – why rush a sale for tax purposes when a better value could be achieved – there are a few months ahead to plan.’
