The Office of Tax Simplification and the government has published a new report on the policy design and principles underpinning Capital Gains Tax, suggesting that a reform could be on the cards.
In July 2020, the Chancellor asked the OTS to carry out a review of Capital Gains Tax, to ‘identify opportunities relating to administrative and technical issues as well as areas where the present rules can distort behaviour or do not meet their policy intent’.
In particular, Rishi Sunak asked for a review of its use in “the acquisition and disposal of property” and “the practical operation of principal private residence relief”.
Blick Rothenberg described the review as an “inevitable tax raid” to recoup some of the money spent during the Covid-19 lockdown period, describing the potential changes as “bad news for investors”.
In the 2016 Budget there was a drop in CGT, apart from on property, where the 18% rate dropped to 10% and the 28% rate dropped to 20%.
The first report found “many features of Capital Gains Tax which can distort behaviour, including its boundary with Income Tax and interconnections with Inheritance Tax”.
The report said that “more closely aligning Capital Gains Tax rates with Income Tax rates has the potential to raise a substantial amount of tax for the Exchequer”.
A second report, which will follow early next year, will explore key technical and administrative issues.
Rachael Griffin, tax and financial planning expert at Quilter, commented: “Chunky reports from the government aren’t known to be produced at speed unless there is a real requirement. The OTS itself acknowledge the consultation has been produced in a shorter timeframe and this hints that change to CGT will be on the cards as the Chancellor looks to counteract the escalating deficit caused by the pandemic. The appeal of changing CGT is clear – only a relatively small number of people pay it. Statistics show that over the course of a decade around 1.5 million people reported taxable gains, far lower than the numbers paying the biggest taxes like income tax and national insurance. It means the tax can be reformed in order to squeeze asset owners, shareholders and landlords without impacting the majority of people.
“It is also a tax that is almost exclusively paid by older, wealthier households. According to the OTS, 97% of CGT tax revenue is paid by over 35s, with most people caught by the tax in their 50s and 60s. It means that raising additional revenues can be positioned as a tax on those with the broadest shoulders.
“The OTS has suggested a package of reforms, some of which are tweaks around the edges that will be relatively quick wins and some which will cause a bit of a stir. The prospect of bringing CGT in line with income tax has been touted for some time and so that is relatively unsurprising, although it would lead to a significant rise in tax paid by those subjects to CGT. And simplification is again at the heart of the OTS’ report, which suggests that there be two rates rather than four.
“Other proposals, such as scrapping CGT uplift on death, have far reaching consequences and need to be considered carefully. One of the biggest challenges of tinkering with the CGT system is its interaction with several other parts of the tax system, in particular inheritance tax, so many changes can be complex and have knock-on consequences for other parts of the tax system.
“In general, the message is clear from the government and the OTS. Use your allowances now or lose them. Changes are on the horizon and why it is not suitable for everyone to change their financial plans because of mere policy speculation it is worth your while to review in light of what will inevitable be a harsher tax environment. Financial advice is critical for anyone wrestling with all the different rules and considering changes.”
Guy Vaughn, from Love Your Postcode added; “These possible tax reforms can be worrying to our investors. If they do materialise, it will mean property entrepreneurs will have to assess their finances in a different light and turn to more creative and new strategies when it comes to investing their money in property. I believe the emphasis would be on cash flow rather than capital gains being achieved through an increase in property prices over the long term”.