The Office of Tax Simplification (OTS), the government’s tax advisory body, has published its first report devoted to Capital Gains Tax. The report was commissioned by the Chancellor, Rishi Sunak, in July 2020 and has been produced at a speed which is unusual for such comprehensive, Government reports. This no doubt reflects the need for the government to look at proposals to fund its Coronavirus (Covid-19) support schemes.
Capital Gains Tax may seem like an easy target for the chancellor to raise revenue. As the report indicates in its introduction, in the 2017/18 tax year £8.3 billion of Capital Gains Tax was paid and £55.4 billion of net gains (after deduction of losses) reported by a total of 265,000 individual UK tax payers. This compares with the £180 billion of Income Tax paid in 2017/18 by 31.2m individual taxpayers. The demographics of those taxpayers are different as well. Whilst income tax has a wide taxpayer base, only a relatively small number pay Capital Gains Tax and those that do tend to be older and wealthier. Most individuals paying Capital Gains Tax are likely to be in their 50s and 60s. Changes to the Capital Gains Tax regime will mostly affect those holding financial investments, business owners and landlords without impacting on the wider taxpaying population.
The Office of Tax Simplification’s report finds that the current Capital Gains Tax Structure “distorted behaviour” and was often counterintuitive with “odd incentives”. The advisory body suggests various reforms, some of which have been proposed previously and others which, if adopted could have quite a significant impact on some individuals.
The disparity in rates between Capital Gains Tax and Income Tax has been considered, by some, to be an unnecessary complexity for some time. The report found that such disparity 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 gains. It goes on to suggest that those paying capital gains tax often have flexibility as to when they dispose of assets and this allows them to structure their affairs in such a way that, over time, they may pay proportionally less tax than others. The report proposes closing the gap between the rates of tax of the two taxes to make the systems fairer.
The report suggests that the Annual Exempt Amount, at its current level, potentially distorts investment decisions. It notes that in tax year 2017/18 approximately 50,000 tax payers reported net gains close to the Annual Exempt Amount for that current year, essentially making use of the allowance through structured tax planning. The report suggests reducing the Annual Exempt Allowance, currently £12,300 in Tax year 2020/21, to between £2,000 and £4,000.
Another main focus of the report is in respect of the “Capital Gains Uplift” that assets receive when a taxpayer dies. Currently, when someone inherits assets they receive them at the value of the asset as at the day the deceased died rather than the date the deceased acquired them. If the beneficiary then disposes of the asset they only pay Capital Gains Tax on any increase in value since the deceased died. This means that individuals can ensure substantial gains are “wiped clean” by simply continuing to hold assets until death. The Office of Tax Simplification believes this behaviour may not be in the best interests of the individuals, their businesses or the wider economy. It suggests removing the Capital Gains Tax Uplift altogether.
Whilst the proposals in the report are wide-ranging and could have a significant impact for some tax payers, they have not yet been adopted as government policy. Whilst the reports of organisations such as the Office of Tax Simplification can clearly influence changes to legislation, what changes will actually be implemented is yet to be seen. It is clear that the government will need to increase revenues and a reform of Capital Gains Tax is clearly one of the areas under consideration.