On Wednesday, the Office of Tax Simplification (“OTS”) published a report on Capital Gains Tax (“CGT”) in response to the Chancellor’s request earlier in the year that CGT be reviewed.
The OTS put forward 11 recommendations designed to simplify CGT and address concerns that the current regime creates distortions in behaviour to attract the most favourable tax treatment. The OTS’ recommendations include the following key proposals:
- more closely aligning CGT with Income Tax – both in terms of rates and boundaries between the two taxes for example in relation to employment related rewards;
- reducing the Annual Exempt Amount;
- removing the capital gains uplift on death– the OTS suggest this should not just be where a relief of exemption from Inheritance Tax (“IHT”) applies but should be reviewed more broadly;
- abolishing Investor’s Relief; and
- refocussing Business Asset Disposal Relief (“BADR”) (previously known as Entrepreneurs’ Relief) on retirement– the OTS suggested that there’s a policy judgment to be made as to the purpose of BADR e.g. whether BADR is designed to stimulate business investment or to provide relief to retiring business owners whose businesses formed part of their investment for retirement.
What do the proposed reforms mean?
These proposed reforms are likely to be of interest to owner-managers of smaller businesses, those considering gifting assets and those with second homes or investments held outside of tax-efficient products such as pensions or ISAs.
For those currently going through a sales process, discussions about alterations to the existing tax regime may provide added impetus for completing those transactions before the end of the financial year.
If you are currently considering selling an existing investment you may want to consider the timetable for that transaction. However, as these are purely recommendations at this stage and the Government are under no obligation to accept or implement the proposals, investors should remain pragmatic and take a measured approach rather than taking any knee-jerk action.
For those considering gifting any assets, these proposals, when reviewed in light of the existing IHT report from the OTS published in late 2019, may provide an additional reason for wanting to press ahead with making that gift.
We would urge caution to those who may be prompted to take action that they were not already considering solely on the basis of the OTS proposals. As with any key decision it will be important to take advice and consider these proposals in the round with the many other factors which will impact the timing and structure of any transaction.
This report was the first of two OTS reports on the CGT system, the second report is due to be published next year and will focus on key technical and administrative issues.
The Treasury has not yet considered the proposals in detail but it would not be surprising if the Chancellor looks at, amongst other things, CGT reform proposals as part of his package of measures to address the economic effects of COVID-19.
If you would like to discuss what the proposed changes might mean for you please contact your usual Burges Salmon contact or Emma Heelis-Adams.
There is a policy judgement for government to make about the extent to which Capital Gains Tax reliefs should be used to seek to stimulate business investment and risk-taking.