Giant task of simplifying CGT
Why are there four different rates of CGT and two or more payment deadlines? Are there too many CGT reliefs? Should CGT be charged on death transfers? Rebecca Cave has ideas for the OTS to consider.
In advance of his Autumn Budget Statement Chancellor Sunak has asked the Office of Tax Simplification (OTS) to identify areas where the taxation of capital gains could be simplified, and investigate how CGT may distort investment decisions.
I have a special relationship with CGT, having spent many years writing books on capital gains for Bloomsbury Professional and editing Sumption: Capital Gains for LexisNexis.
It’s a complex tax that most taxpayers rarely encounter, as you need to be asset-rich in order to become liable to pay CGT. Companies don’t pay CGT, as any gains they make are subject to corporation tax with the taxable gains calculated according to different rules, and that’s just part of the problem.
I am delighted that the OTS is taking on the huge task to review CGT, including the numerous reliefs, exemptions and allowances that can apply. The OTS scoping document confirms that it will look at all aspects of this tax that affect small businesses and individuals. Issues relating to corporate groups such as SSE and company reorganisations will not be covered.
At stage one of the review, the OTS is asking for input from individuals and tax advisers to highlight which parts of CGT cause taxpayers particular problems. I would suggest starting with the online reporting of gains arising from the disposal of real property, which is a morass of unnecessary complexity. To contribute your views fill in this survey, or send an email to [email protected] before 14 August 2020.
The second part of the review will examine the technical detail and practical operation of CGT, and to help with that the OTS is setting up a consultative committee including leading tax experts such as Helen Thornley, Paul Aplin and Pete Miller. This technical stage will report by 12 October, just in time for the Autumn Budget, where we could see dramatic changes to some well-loved CGT reliefs.
Here are my ideas to cut CGT down to size, which may also raise a bit more revenue.
Individuals pay no CGT on the first £12,300 of gains in a tax year (2020/21 annual exemption). Why is this exemption so high? Is it to avoid taxpayers having to complete a tax return to report relatively small amounts of capital gain?
If the online reporting system could be improved and fully integrated with the personal tax account (PTA), the annual exemption could be reduced to a modest level of, say, £3,000. Tax advisers also need to be given access to their client’s PTA to make reporting of CGT less of an onerous process.
There are currently four different rates of CGT (10%, 20%, 18% and 28%) which depend on the level of the taxpayer’s income for the tax year and partly on the type of asset the gain has arisen from. This is ridiculous. When I started working in tax there was one rate of CGT: 30%.
I would like to see Sunak go back to basics and impose one rate of CGT on all gains at say 40%. As most people who pay CGT are likely to also pay income tax at 40% or 45% (unless they are Scottish residents, which creates another problem), this high flat rate would remove much of the temptation to turn income into gains.
Since the start of self-assessment CGT has been payable by 31 January following the end of the tax year in which the gain arose. This gives taxpayers up to 20 months to spend the tax they should pay over to HMRC. Perhaps this is why there is now a 30-day deadline for paying the “on account” CGT arising from property disposals. But there are different rules for UK residents and non-residents that require on account payments of CGT relating to different classes of real property.
Could payment of CGT be simplified so there is one payment deadline for all gains irrespective of what asset it arises from? I suggest that 30 days is too short, but 60 or 90 days from the completion date would be reasonable.
Date of disposal
I have never understood why the disposal date for CGT is the date that contracts for disposal of a property are agreed, not the date the contracts are finalised and the money is paid (the completion date). In some cases, such as for compensation payments, the disposal date is the time the money is received.
If the payment period for CGT is triggered by the completion date, why can’t that date also be the disposal date for CGT?
Too many reliefs
Back in 2016, I lamented the introduction of yet another CGT relief (investors’ relief), which aims to reduce the tax payable on the disposal of unquoted company shares, in a similar manner as six other CGT reliefs already on the statute book.
The leading small business relief, entrepreneurs’ relief, has already been trimmed back in the 2020 Spring Budget, such that the maximum gain it can cover is now only £1m. This relief is surely for the chop, as it has been criticised as being badly targeted and costs £2.2bn per year according to the NAO.
The same NAO report estimated that the CGT exemption for gains arising on the disposal of the taxpayer’s main residence costs £26.7bn per year, and tops the chart as the most expensive of all tax reliefs. Two reliefs that extend main residence relief for periods of letting and the final months of ownership, have already been curtailed from April 2020, so perhaps a brave new Chancellor will reform the main residence relief further.
I suggest main residence relief is transformed into a form of CGT roll-over relief, such that the gain made on a home rolls into the base cost of the next home. Perhaps there could be an exemption if the proceeds from a home are used to buy a government bond to pay for long-term residential care.
IHT or CGT?
The OTS has already made suggestions on how to improve IHT, but some commentators suggest IHT should be abolished completely and CGT charged on assets transferred on death instead. That would be a very brave step indeed.
Rebecca Cave and Helen Thornley will be joining Any Answers Live on 28 July to answer your capital gains tax questions. Register to join this live and interactive webinar here.