The Office of Tax Simplification’s CGT Review: The Initial Report

The Office of Tax Simplification (OTS) has published the first report of their review of capital gains tax (CGT). It focuses on the policy design and principles underpinning CGT.

The final report, which will follow early next year, will explore key technical and administrative issues. Both reports are based on findings from the OTS’s analysis of evidence and feedback gathered during a consultation exercise which ran from July to November 2020. The OTS received contributions from representative bodies, professional advisers, businesses, academics, public survey and a specially formed Consultative Committee.

The key findings

The OTS said its consultation revealed a “range of areas” in which capital gains tax is “counter-intuitive”, creates “odd incentives”, or creates “opportunities for tax avoidance.”

It also raised specific issues, including:

• The rates charged.
• The boundaries between income and capital gains arising from employment, business and entrepreneurial activity in different contexts.
• CGT application to transfers before and after death.
• The links between CGT, IHT and income tax.

There were also a range of opinions on the potential need for tax incentives to encourage risk taking or entrepreneurship. The debate here was whether any incentive could be sufficiently targeted not to lead to unnecessary distortions.

The OTS’s recommendations

The report divided into four areas that include key findings and a number of recommendations:

•   Rates and boundaries
•   Annual exemptions
•   Capital transfers
•   Business reliefs

The recommendations include aligning CGT and income tax rates, or reducing the number of CGT rates and their link to income tax bands; reducing the annual exempt amount; requiring investment managers to report CGT information to both the taxpayer and HMRC to make tax compliance easier on individuals; removing the capital gains uplift on death and rebasing all assets to the year 2000; replacing the new Business Asset Disposal Relief with a relief more focused on retirement; and abolishing the Investors’ Relief.

News from the Treasury suggests that though the report is welcome, the Chancellor is focused on mitigating the economic effects of the coronavirus and will wait until next year before addressing the fiscal hole the pandemic has created.

FSL is monitoring the outputs from the review closely to ensure there is minimal disruption to CGiX users. If you have any concerns about the impact of the review on CGiX or would like to discuss further, contact FSLBA&I@financialsoftware.co.uk.