13th November 2020
The Office of Tax Simplification (OTS) has published its first report as part of the Capital Gains Tax (CGT) review undertaken at the Chancellor’s request 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’.
The report’s key recommendations include:
- Aligning CGT rates with Income Tax rates, with allowance for inflationary gains and more flexible use of capital losses
- Charging business profits that are returns on personal labour rather than capital investment to Income Tax (including share options)
- Reducing the annual exemption significantly, link real time reporting to taxpayers’ Personal Tax accounts
- Requiring investment managers to report gains to HMRC
- Removing CGT uplift on death on Inheritance Tax (IHT) exempt or relieved assets, or possibly on all assets
- If the CGT uplift on death is abolished, rebase assets to 2,000 values and extend holdover relief to some non-business assets
- Replacing Business Asset Disposal Relief (previously Entrepreneurs’ Relief (ER)) with something more focussed on retirement
- Abolish Investor’s Relief
If implemented, these recommendations would represent a major re-write of the CGT regime, in some cases increasing the effective tax rate from 10% to as high as 45%, with business and second home owners among those likely to be affected. The removal of the CGT uplift in base cost on death may mean that both IHT and CGT would be due on the same assets, held by an individual until death, and sold by a beneficiary thereafter. All indicators point to this being the ideal time to review your family’s finances and to plan for CGT and IHT. Structuring business and family assets now and engaging in succession planning will save tax in future years.
Share options and ER have been widely utilised by business owners and entrepreneurs to achieve a tax effective outcome for themselves and their key employees. Focused incentives for entrepreneurs will be key to economic recovery in the coming months and years.
Whilst the report states ‘this review is focused on individuals’ liabilities and does not cover trusts or the attribution of offshore gains to UK resident individuals’, it may have a significant impact on the tax rates for offshore trustees. Please see James Walker’s summary here for further details.
Should the Chancellor adopt some or all of the recommendations, an announcement could come as early as the Spring 2021 Budget. This is the first of two reports by the OTS: it is expected that the second will follow in early 2021 and will focus on technical and administrative issues.