Government reform of Capital Gains Tax – OTS report conclusions’ published

The Office of Tax Simplification has this week (11 November) published a new report on Capital Gains Tax (CGT) following the Government’s request for it to be reviewed to ‘identify opportunities relating to administrative and technical issues as well as areas where the present rules distort behaviour or do not meet their policy intent’.

This consultation has highlighted a number of areas where CGT is ‘counter-intuitive’ and creates odd incentives’ adding ‘some respondents argued that CGT is a barrier to economic growth, others that it is a barrier to a more equitable society.’

The report goes on to conclude that ‘the disparity in the rates between CGT and Income Tax can distort business and family decision making and creates an incentive for taxpayers to arrange their affairs in ways that effectively re-characterise income as capital gains.’

Other key findings include:

• The high level of Annual Exempt Amount can distort investment decisions and should be reduced.
• CGT incentivises owners to transfer business and personal assets to others on death rather than during their lifetime which may not be best for the businesses, individuals or families involved.
• The Government needs to decide with policy the extent to which CGT should be used to stimulate business investment and risk-taking.

So how will the recommendations in the report affect you in the future?

We don’t yet know the extent to which the government will act on these findings but any changes to CGT are likely to have a significant impact for property investors, second homeowners, shareholders, entrepreneurs and family trusts.

Buy to let investors with portfolios held personally or in corporate structures will feel changes if they look to sell parts of their portfolio or shares in the company that holds property. Property investors have been the target of many recent tax changes and may feel unfairly targeted at a time when they are facing COVID-related rent holidays from tenants.

Individuals with a holiday or second home could face, if they are an additional rate taxpayer, a CGT rate of 45% on any gain from the sale of property and will have just 30 days to settle any liability. Many may inevitably choose to hold on to property seeking rental incomes instead which could have a long-term effect on the property market in some areas.

Individuals holding shares and family trusts are also likely to be hit by any changes to capital gains tax rates. The sale of shares whether by an individual or a family trust is liable to capital gains. That is currently capped at 20% but could increase to as much as 45% assuming the CGT rates are aligned with income tax rates. We would not be surprised to see shares “dumped” in advance of any changes to CGT rates, but would remind investors and family trusts that any sale of shares should be driven by a wider and long-term investment strategy and not by tax alone.

Depending on the timeframe that any changes are implemented, entrepreneurs may be dismayed by any changes to CGT on the sale of a business. CGT is charged at the point of unconditional contract exchange, not completion and some might be tempted to try and rush through the sale of a business to beat any new changes being introduced. It may be that contracts can be exchanged and the completion date stretched to allow sale details to be ironed out.

When changes to Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) were introduced in April 2020 they also brought about anti-forestalling rules which meant that in certain circumstances the date of the transaction for CGT purposes was treated as being completion as opposed to exchange of unconditional contracts so not to benefit from the more generous allowances prior to 6 April 2020. It is possible that such a measure could be included in any proposed CGT changes and therefore understanding all of the potential tax costs prior to making a decision on disposing an asset is more important that ever.”

To discuss any of the topics explored in this article, contact Jo White or your usual Kreston Reeves contact.