Capital gains tax changes are coming

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Following the Chancellor’s request for the Office for Tax Simplification (OTS) to carry out a review of capital gains tax, the OTS published it’s first report yesterday.

The report can be found here.

The OTS has made a number of recommendations in the report, these can be summarised as:

  • Recommending the government considers closely aligning capital gains tax rates with income tax rates – meaning an increase in capital gains tax rates or “considering addressing boundary issues as between capital gains tax and income tax” (which we interpret to mean reducing the deemed scope to convert income into capital – citing profits retained in companies at the point of liquidation as one example, and share based employee remuneration being another);
  • Recommending that if the government considers closely aligning capital gains tax rates with income tax rates, it should also consider: reintroducing a form of relief for gains that are attributed to inflation (something akin to the old indexation allowance presumably); consider the interactions with the tax position of companies (to mitigate the incentive for the realisiation of gains in limited companies); and, consider mechanisms for greater flexibility of the use of capital losses.
  • Recommending that if the rates of the two taxes aren’t aligned – that the number of capital gains tax rates should be reduced, and the dependence on the taxpayer’s taxable income to calculate their capital gains tax liability should also be reduced – as a strive towards simplification.
  • Recommending that if focusing on addressing the so-called “boundary issues” is the chosen route – that consideration should be given to achieving consistency between employees and owner managers’ – suggesting accumulated retaining earnings in a limited company should be subject to income tax on liquidation or sale, and changes to share-based incentivisation for employees.
  • Recommending that the capital gains annual exemption (currently £12,300) is significantly reduced – to between c£2,000 – £4,000.
  • Stating that the way that inheritance tax and capital gains tax interact is “incoherent and distortionary“. The report focuses on the capital gains base cost uplift currently received on death (the OTS in their review of inheritance tax (see our previous blog post here) recommended that this uplift was removed where an inheritance tax exemption or relief applied). The OTS recommend here a wider consideration of no uplift on death for all assets and for a so-called ‘no gain/no loss” treatment – meaning the recipient of an asset on death inherits the deceased historic base cost (effectively deferring any latent gain to the recipient), and that if this was implemented, that ‘no gain/no loss’ treatment should apply to all lifetime gifts. This would obviously incentivise more lifetime gifting.
  • Irrespectively, the OTS echo their recommendation in their inheritance tax review that the capital gains base cost uplift should be removed where an exemption from inheritance tax applies on death.
  • Recommending that ‘business asset disposal relief’ (formerly ‘entrepreneurs relief’) is replaced with a more focused relief on retirement.
  • Recommending that ‘investors’ relief’ is abolished.

Overall, some quite radical changes are recommended.

Clients concerned by these changes should consider planning, and it would be prudent to do so before the next Budget. The OTS carries a lot of weight and, ‘by and large’, these recommendations should be considered almost a blueprint for future change.