Capital Gains Tax review may help landlords and second homeowners to cut their tax bills under new proposals for capital gains duties, despite the reforms being introduced to raise revenue for the Government & this may be possible due to the reintroduction of an indexation allowance.
By reintroducing indexation allowance, individuals would be able to exclude the effects of inflation from their chargeable gains when selling an asset such as a property.
Buy-to-let investors will be amongst the groups most impacted by a CGT rates hike & to avoid having to pay an enormous tax bill on the sale of an investment property, owners could consider splitting beneficial ownership.
Rather than selling a property on the open market, an owner who is worried about CGT going up could give a share in it to his children. This would count as a part disposal and would trigger a gain at the present rate of tax
The Office of Tax Simplification (OTS) has published ‘Simplifying by Design’, the first report of its current Capital Gains Tax (CGT) review. It recommends some major changes to CGT including increasing tax rates and removing business asset reliefs.
Capital Gains Tax review report makes eleven recommendations, many of which do not appear to simplify CGT, although they may appeal to the Chancellor, Rishi Sunak, as methods for raising tax revenue.
They include ideas to:
- – More closely align CGT rates with Income Tax (IT) rates.
- – Reintroduce an indexation allowance.
- – Reassess share scheme taxation particularly for small business.
- – Remove some CGT reliefs for owner-managed business.
- – End CGT re-basing on death but to introduce re-basing to 2000.
- – Scrap Business Asset Relief and Investor Relief.
- – Reintroduce a retirement relief.
It highlights that the new system of 30-day reporting and payment of CGT on residential properties is “very problematic”. Concluding that: “There needs to be a strategic look at the reporting and payment of CGT and whether it should sit alongside income tax self-assessment or be completely separate. At the moment we have a confusing mix.”
The OTS’s recommendations
Rates & boundaries
If the government considers the simplification priority is to reduce distortions to behaviour, it should either:
- – consider more closely aligning Capital Gains Tax rates with Income Tax rates, or
- – consider addressing boundary issues as between Capital Gains Tax and Income Tax
If the government considers more closely aligning Capital Gains Tax and Income Tax rates it should also:
- – consider reintroducing a form of relief for inflationary gains.
- – consider the interactions with the tax position of companies.
- – consider allowing a more flexible use of capital losses.
If there remains a disparity between Capital Gains Tax rates and Income Tax rates and the government wishes to make Tax liabilities easier to understand and predict, it should consider reducing the number of Capital Gains Tax rates and the extent to which liabilities depend on the level of a taxpayer’s income.
If the government considers addressing Capital Gains Tax and Income Tax boundary issues, it should:
- – consider whether employees and owner-managers’ rewards from personal labour (as distinct from capital investment) are treated consistently and, in particular
- – consider taxing more of the share-based rewards arising from employment and of the accumulated retained earnings in smaller companies, at Income Tax rates.
Annual Exempt Amoun
If the government’s policy is that the Annual Exempt Amount is intended mainly to operate as an administrative de minimis, it should consider reducing its level.
If the government does reduce the Annual Exempt Amount, it should do so in conjunction with:
- – considering reforming the current chattels exemption by introducing a broader exemption for personal effects, with only specific categories of assets being taxable.
- – formalising the administrative arrangements for the real-time capital gains service and linking up these returns to the Personal Tax Account.
- – exploring requiring investment managers and others to report Capital Gains Tax information to taxpayers and HMRC, to make tax compliance easier for individuals.
Where a Relief or Exemption from Inheritance Tax applies, the government should consider removing the capital gains uplift on death and instead provide that the recipient is treated as acquiring the assets at the historic base cost of the person who has died.
In addition, the government should consider removing the capital gains uplift on death more widely, and instead provide that the person inheriting the asset is treated as acquiring the assets at the historic base cost of the person who has died.
If the government does remove the capital gains uplift on death more widely, it should:
- – consider a rebasing of all assets, perhaps to the year 2000.
- – consider extending Gift Holdover Relief to a broader range of assets.
The government should consider replacing Business Asset Disposal Relief with relief more focused on retirement.
The government should abolish Investors’ Relief.
The report only focused on individuals’ liabilities and does not cover CGT for trusts or the attribution of offshore gains to UK resident individuals. Neither does it explore CGT in the years of an individual’s arrival or departure from the UK.
As this review focuses on policy design and principles underpinning the tax, a second report will follow next year and will explore key technical and administrative issues.
Further details can be found on the gov.uk website here.