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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. 

21st Jul 2020
Tax Writer Taxwriter Ltd
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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.

Annual exemption   

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.   

Rates charged

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.   

Payment dates

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.

Replies (29)

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By ireallyshouldknowthisbut
21st Jul 2020 13:11

The main issue I come across as "unfair" is the inflation taxes on property.

if the mainline rate is the marginal rate (I see no reason for it not to be 20/40/45, as there is no reason to suppose capital gains are 'better' than income tax gains) then you need to index the gains. That was gotten rid of 10+ years ago, mainly on the basis that it was fiddly but software will now do that instantly so this is no longer the case, so time for a full circle on that one. Whilst inflation is low now, over 20 years it really mounts up, and acts as a bit block to sale.

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Nigel Harris
By Nigel Harris
22nd Jul 2020 09:51

I totally agree with the notion of reforming CGT, as you say it's far too complicated.

Aligning CGT and income tax rates would negate the practice of converting income to capital, so seems a sensible idea.

The underlying question is what exactly is CGT designed to tax? A Tory administration is unlikely to countenance a wealth tax, so it must be more focused than that. If investors save their taxed income in assets that are ultimately liable to high rates of CGT, doesn't that discourage saving? Maybe in a post-Covid world that's what we need to do, of course, keep money circulating in the economy.

When inflation was higher at least Indexation Allowance stripped out the effect of inflation so only the real terms gain was taxed. Restoring some relief for long-term gains would seem fair.

The loss of holdover relief on gifts has been the biggest problem for many of my clients. It is simply impossible for many to make lifetime gifts of capital assets, say to the next or later generations, so capital is getting stuck with aging family members, who of course tend to live longer these days too. There has to be a way of unlocking these assets without an immediate tax bill.

I note the big push to reform CGT comes not many years since all the talk at Budget time was of abolishing CGT altogether because the tax take was so small compared with the effort involved in collecting it!

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By pauljohnston
22nd Jul 2020 10:32

I personally would abolish it the yield is small and it only effects private investors.

The row about the Entrepreneurs relief looked good on paper but the changes had very little effect on the tax collected.

The online reporting of gains arising from the disposal of real property is as Rebecca says is complex. To make it easier why not have an option to pay say 15% of the tax due (with in 30 days) and to sort out the calculation with the balance being sorted out by extra tax/refund in the self-assessment or CGT only return either for submission by 31 January as currently.

I support indexation of gains. In 1982 we had a revaluation of assets why not another 31.3.2020. The main problem is that one is only required to retain tax records for 3-6 years but many assets are held for much longer periods. So may be rather than a revaluation gains made on assets held longer than XX years should be exempt.

If the chancellor is looking at tax raising get rid of 10% and 18% rates for all except entrepreneurs relief would raise money.

The revaluation at death is a good idea because records in deceased cases seem to be even harder to find.

Taxing gains has a negative effect by encouraging movement into exempt assets where as purchase of shares provides capital to help business grow and employ more (paying tax and NIC)

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By tedbuck
22nd Jul 2020 11:07

I have always felt that CGT is just a tax on inflation where property is concerned. There is often no benefit to a seller as he/she is buying in the same market and anyway the greedy governments take so much in SDLT that any incentive to move house is negated by the cost. Remove PPRR and I should think the house market would freeze over. The law of unintended consequences is ever present in taxation and we can do without people fiddling around the edges 'to make it better'.
Brown and Osborne were experts at messing things up by being 'clever and inventive' and the current incumbent certainly doesn't need help in that area when he has the Treasury behind him as their level of incompetence is fairly staggering. I mean they have to call in tax trainers to explain their own laws to them - what more can you say.
Brown's losing ACT caused pension schemes to lose income which ultimately caused many of the shortages in funds, which in turn stifled the capital markets by reducing the amount of money available for investment. Plus IR35 was Brown - a 20 year debacle which shoved everyone into companies because of his tax free £10k starting rate in Companies and so on.
Osborne was so clever clogs that he destroyed the BTL market and a lot of peoples savings for old age at the same time in the name of freeing the housing market which I don't think it has as a developer told me they were just building less.
And why do they do this? So that they can support the grotesque overburden of useless civil servants drafting more and more regulations to waste all our time. A Liquidator told me this week that their fees would have to be £500 more because they had to do money laundering on 4 extra shareholders in a private company. And teachers have been given a pay rise higher than any other civil servant for sitting on their duffs for the last 4 months doing practically nothing. Add to that the GPs who have done much the same and declined to assist people who actually need help and it isn't difficult to see why they want more taxes.
Personally I think the supermarket assistants are far more deserving of a rise in pay as are many other similar workers in similar jobs.
So a cull of civil servants would be a good start to the budget and leave taxes alone as they are already too high.

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Replying to tedbuck:
By ireallyshouldknowthisbut
22nd Jul 2020 13:15

Completely off topic, but this:

tedbuck wrote:

And teachers have been given a pay rise higher than any other civil servant for sitting on their duffs for the last 4 months doing practically nothing.

!!!!!!!!!!!!!!!!!!!! You clearly are not anywhere near anyone who is education.

Schools have been open EVERY DAY since lock down commenced, albeit with small class sizes. No easter break for teachers. NO half terms. They have had to copy with bewildering new rules which change daily and are incoherent and inconsistent. Teachers have had to completely redo all their lesson plans and deliver it online (whilst also teaching their smaller classes in the day time), which many have done brilliantly. They have still had to do all the marking, PLUS they have had to spend hours and hour with parents trying to help them teach their children. Most teachers have been putting in phenomenal amount of effort and hours this past 4 months

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Replying to ireallyshouldknowthisbut:
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By tedbuck
22nd Jul 2020 14:49

I am quite sure you are right but my experience from parents and my neighbour who is a teacher and is very frustrated by the whole affair is that few state schools have made much of an effort with 'at home' pupils. Private schools seem to be quite the opposite but not everyone can obtain private education.
Like all generalisations it is not going to be 100% but it is reflective of feelings around my area. An acquaintance who is a deputy head teacher reckons that the numbers attending her school are so small it isn't worth being there. Is that a surprise? I wouldn't have thought so.

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By petestar1969
22nd Jul 2020 12:02

Removing the PPRR exemption would, I believe, be a bad idea unless its coupled with lower SDLT rates and/or a return to MIRAS for people's own homes.

I agree the idea of rolling-over such gains would be simpler but would it raise any tax?

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Replying to petestar1969:
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By Joe Soap
22nd Jul 2020 16:11

I was looking primarily at simplification rather than raise more tax.

Bbut it would raise some tax when (usually older) people trade down and release funds.
Although it might dissuade people doing this a bit but in my experience (as a member of that group) is that older people are often pretty reluctant to downsize

Your SDLT and MIRAS points could be relevant but I was not looking at them at this point.

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By North East Accountant
22nd Jul 2020 13:21

The Government are not interested in simplification of the tax system as every budget and finance act proves.

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By Joe Soap
22nd Jul 2020 13:25

What is the justification for taxing accretions to wealth from work at a higher rate than accretions to wealth through the increase in the value of assets? Nigel Lawson was right when he set the CGT rates at the same level as Income tax rates. Suddenly a whole (unproductive) industry that was trying hard to turn income into capital gains became irrelevant. The rate should be same as the individual's marginal tax rate.

And (probably all) exemptions should be removed - including PRR, and replaced with reinvestment relief to the extent that the proceeds are reinvested in appropriate assets.

Then abolish IHT and replace it with CGT on assets transferred on death.

and when that has been done, combine NIC into Income Tax.
and then we would have a simpler tax system- and who doesn't want that?

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By whitevanman
22nd Jul 2020 18:15

I put my savings in the bank and get almost nothing in interest. Nonetheless it is taxed. Why should it be different if I invest in say property? Why, as the owner of a company, should I be able to choose between several different methods of extracting my profits and pay different rates of tax?
People talk about abolishing CGT and the small amount of yield it generates, but they forget the "protection" issue (which was most recently demonstrated by the need for reforms to ER).
Why is it that whenever someone asks for suggestions, the numpties come out in force?
The vast majority of people would love to make a capital gain, if only they had one of those pesky assets. I daresay some might even be content to pay tax on it.
It is not surprising that the Chancellor is contemplating some reform (after all he and Boris got where they are as a result of a shift in voting habits and may fear a reversal).
The one relief that affects larger numbers is PPRR. Again, for the overwhelming majority, it works as intended. It is the minority (an increasing number over the last 20 years or more) who abuse the relief. For example, how many builders etc do you know who build a property and then "live" there as their "PPR" for 6 months, thereby getting a large, tax free gain? With Tribunals deciding cases on the basis of alleged "intention" HMRC is fairly powerless to challenge this.
Person buys a property from which they carry-on a business. With luck and no small effort, they make profits. After some years decide to sell. Make profit on property and goodwill sale. Again, why should that be more favourably taxed than, say, my investment in stocks and shares? Why should it be more favourably taxed than the property gain made by a landlord after providing a home for tenants over many years?
There are countless examples and everyone will have their opinions about the value/ benefits of the various reliefs.
IMHO all income and gains, from whatever source, should be taxed at the same rate(s). Many of the reliefs are open to abuse and there is doubt whether many are justifiable and / or achieve their intended result.
A review of such matters is long overdue and if the Chancellor is true to his word, that may mean a levelling of tax rates. Hopefully it will also mean reviewing reliefs and simplifying the CGT regime generally. What it should not be is a poorly disguised attack on the PPR exemption for everyone, just because that would be an easy way to raise funds.

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By cfield
23rd Jul 2020 01:01

If you really want to know why there are 4 CGT rates, the answer is obvious. It's because the Government hates private landlords and wants to tax them to death. We all know that.

I thought you wanted to simplify CGT. I don't see how dragging everyone into CGT by abolishing PRR is going to simplify it. Think of all the form filling. Think of all the unfair penalties! There is enough deterrent to moving house already with ridiculously high SDLT rates, which by the way impact unfairly on people living in London and the South East.

Interesting how you describe it as an “expensive” relief. You almost make it sound like they’re giving us money. No they’re not. It’s us keeping our own hard earned money to spend as we wish. Incidentally, that money is then taxed in VAT and on the profits of the firms we buy from, so the Government gets its pound of flesh in the end.

The housing market creates all sorts of economic activity, such as tradesmen, building materials, white goods, furnishings, surveyors, solicitors. We need people spending more money on these things, not less. And if you roll over the gains the whole thing becomes pointless anyway, as people will refuse to downsize, no tax will be paid and the gains will be wiped out when they eventually die.

As for ER, isn't it about time people got off this particular hobby horse? Reducing the lifetime limit to £1 million was a sensible reform which protected the retirement nest eggs of most small business people whilst stopping private equity investors getting most of the benefit. If you abolish ER, will you being back taper relief or retirement relief? Oh I forget. It is retirement relief really, isn't it. Darling just gave it a sexy name to make it sound business-friendly.

As for the AE, reducing it to £3k would drag 10 times as many people into the CGT net. Not exactly a simplification. Think of all the small shareholders who'd have to pay it every time they sell off old stocks. Think of all the confusion and the penalties for not knowing the rules, especially the older people who just want to cash in their life savings. CGT is for gains built up over several years and makes no allowance for inflation, so the current £12,300 is perfectly fair and reasonable. It is not equitable to compare it with the Personal Allowance, which is only for a year's income.

CGT has had enough reforms over the last 20 years. Time for some stability. Stop fixing what ain't broke. There must be something else we could give the OTS to do to justify their existence.

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Replying to cfield:
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By whitevanman
23rd Jul 2020 12:41

Agree much of what you say about the PPRR but feel there is still room to tighten up to ensure relief is properly targeted.
Don't agree comments re ER. Might have some sympathy if there was a tie to retirement and no other pension relief but not at all convinced.
The bit I most disagree is the AE comments.
Every time the subject is raised those against talk about poor pensioners who are too stupid (or so they suggest) to fill in a tax return. They also argue about the number of people who will be dragged into the tax net. First, as far as I am aware, there are absolutely no figures available (to anyone) that would support such comments. Yes there are a number of people who have investments in shares at a low level. In many cases they have chosen this specifically because of the advantageous tax treatment. But most people who invest on the stock market operate at a higher level. Often trading shares regularly.
In 1965 about 55% of shares in UK, quoted, companies were held by UK. By 2008 UK individuals held only 10%. 55%are held by non-UK entities. The idea behind the AE amount was that it would avoid large numbers of people having to return very small amounts of gains (on whatever assets). It was probably the right thing to do at the time. The world was a vastly different place then (as were peoples incomes and investments). An exemption of £1,000 was sensible. The personal tax allowance at the time was only a few hundred pounds and could not be set against gains. For whatever reasons, the exemption now stands at £12k and the rate of CGT is dependent (in part) on the individuals marginal rate. The exemption is, IMHO, no longer justifiable. Those who benefit most are those who have relatively large amounts invested (often the most wealthy) and realise gains every year.
The simplest reform would be to reduce it back to £1,000. That way, people who genuinely do have a little nest-egg would not have to make a return for the sake of a £50 gain. The measure would achieve its aims and would not be sufficient to distort any investment planning (or do I mean tax planning?). If gains were just treated as income, the Personal Allowance would be available to use (for those with insufficient other income) and everyone would be dealt with equally. Compare that to the current position:
Person A has income from employment of say £25k pays tax on (say) £13k.
Person B has pension of £15k and interest of £10k. Pays tax on £13k.
Person C has profit of £12k and gains of £12k, pays no tax at all.
Please explain why this is good, desirable, beneficial to UK plc or in any way fair.

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Replying to whitevanman:
By cfield
23rd Jul 2020 14:43

A £1,000 AE is so low as to be practically useless in terms of avoiding tax returns on low-value gains. If you are selling shares you've held for 20 years, the gain is likely to be more than that.

A fixed AE of any sum would wither on the vine and be worth next to nothing in years to come. Then we'd have to ask the OTS to recommend abolishing it as a waste of everyone's time. A historical anomaly.

People are not too stupid to do tax returns or know when they should be done, but they are complacent when it comes to smaller transactions and not very good at keeping up with the constant changes in the rules. People have been selling shares for years without paying CGT on them. Probably only a tiny % of share sales these days necessitate a CGT return. Why create such huge hassle for everyone for so little return?

You also ignore the fact that these gains accumulate over many years/decades. There ought to be some sort of accruing exemption based on years held, but that would massively over-complicate it, so a decent AE is the easiest solution.

Otherwise you would encourage short-termism, where people sell shares every year to use up their measly £1k AE and re-invest in other shares, knowing that they'd have to file CGT returns and be clobbered for tax if they let the gains rise much further. Even more investment activity would be driven by tax-avoidance.

Also, as it is now almost 40 years since the last re-basing, a huge proportion of gains now are inflationary. It simply isn't fair to tax people on money that isn't worth much more than when they invested it. They won't bring back indexation so a high AE at least mitigates that perverse aspect of the CGT system somewhat. You could call it indexation by another name. Again, the simplest solution.

I'm going to be really outspoken now. Investing in the stock market is good. It is thrifty, it is investing in the British economy and it generates wealth. It is the sort of behaviour we should be encouraging, not penalising. Otherwise, we might as well all blow our savings on having fun and then come running to the state when we are old and poverty-stricken. Investment gains deserve to be taxed less.

As for ER, it was a stupid idea in the first place. Alistair Darling saw a chance to get political brownie points by clamping down on all those private equity investors paying less tax than their cleaners, but it backfired, because he forgot about all the ordinary people it would affect, so he sweetened the pill by inventing ER. It should have been targeted at retirees, just like RR was, but that wouldn't have been so sexy.

We've now got a sensible lifetime limit, we've got anti-avoidance rules to stop the phoenixing, so let's just leave it alone. If people are still abusing it, they need to enforce the rules better, not ruin it for everyone. Some proper liaison between HMRC and Companies House would help no end, but that would require some common sense, hard graft and political will - qualities in short supply!

Same goes for the DIY builders abusing PRR. No need to throw the baby out with the bath water. Just enforce the rules better. It wouldn't be hard to prove there is insufficient permanence or continuity to short-term occupation of a new-built property. We just need to employ a bit more intelligence, both as a noun and an adjective.

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Replying to cfield:
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By whitevanman
23rd Jul 2020 16:05

The AE was not to avoid the need for tax returns as such. It was because people who didn't get a return would be required to notify chargeability on very small gains (and might subsequently be served with a return for completion). If you look at tax more widely, there is no de-minimus figure for taxation. As a general rule, HMRC apply a level of, say, £100 - 200 below which they might not assess but for debts, they typically pursue any outstanding sum and do not ignore amounts above (say) £30.
Against that general background, suggesting that it is not worth pursuing gains of £3,000 (say) on which tax might be £600 is clearly wrong.
In the world today, losing the tax distinction between CG and other income would be sensible. A limit of £1,000 takes out the numerous, small, gains and serves the purpose for which it was originally intended.
As to inflation, I do find this a difficult argument to accept. I am taxed on my income without regard to inflation. Also, if I put my money into some other form of investment, such as with a bank etc, no one gives any allowance for inflation. Nor have they ever done so. There are many other such examples.
I would accept that, sometimes, investment in quoted shares can be beneficial to the wider economy but I am not convinced of the extent. Even accepting there is some wider benefit, why is investing directly in a bank, which will then lend money to business and homebuyers etc, not equally beneficial?
The simple fact is that such distinctions do not stand up to critical examination.
Generally speaking, people invest on the stock market because they hope to make a gain (whether long- or short-term). It is not because they seek to benefit the country. For most other assets that would be trading and therein lies another reason why the CG distinction is kept. For all those who make profits, there will be others who make losses. No Chancellor wants to reduce the tax take by giving relief for such losses. I don't say such relief should or would have to be given but it might be seen as unfair to do otherwise. Either way, something else that would have to be considered.
The easiest way to simplify is to do away with the Cap/inc distinction and the numerous exemptions that lack justification and that were, usually, introduced for some political purpose rather than a genuine need (your comments re ER rather support this).

I don't know why you would consider that we now have a "sensible lifetime limit" at £1m. Why is it necessary at all? Why should the gain not be taxed?
If it was an alternative to pension relief there might be some justification but it isn't. It is on top of such. It was supposed to encourage entrepreneurs to build-up a business and then pass it on leaving them to repeat the process (rather like the SSE). But it does nothing of the sort (again like SSE). It just encourages the short-termism you decry and led to numerous schemes to avoid tax.
As to the DIY builders, there have been many cases where relief has been given despite the fact that no-one would consider it appropriate. Also, there is no requirement to return a disposal qualifying for PPRR, making it difficult to discover.
The easiest way to solve that problem is by changing the rules to require a minimum period of, proven, occupation as PPR, coupled with a sliding scale of exemption. So, for example, a minimum 6 months residence to qualify, 10% relief at that time rising to 100% after 3 years residence.
We all have our views on such matters. It seems to me that, whilst one could tinker with CGT, it would be better to do away with it altogether and tax the gains under normal, IT rules. The essential reliefs could be retained in an improved form. That would simplify matters. Simply tinkering with what we have, always results in greater complication.

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Replying to whitevanman:
By cfield
24th Jul 2020 02:34

Avoiding the need to notify chargeability is pretty much the same as not having to file a tax return, given that most private investors are on PAYE and don't have to do them ordinarily. That's just playing with words.

It's a lot of effort just working out whether you exceed the AE in the first place as it is necessary to look up the original cost of the shares, often from many years or even decades ago. At the present level, that chore can usually be avoided, but at £1,000 nearly everyone would have to do it. Not only would it drag hundreds of thousands of people into Self Assessment for very little gain. It would be a huge pain for millions of others too.

Simplifying a tax system should include automating it as much as possible. PAYE keeps it simple. Making people file tax returns, or forcing millions more to check if they need to file a tax return, does not. I wonder how many of them would grasp the complexities of share pools and bed & breakfasting. It really would be a huge and totally unnecessary burden to put on the public.

In any case, governments have long encouraged private investors by introducing first PEPs and then stocks and shares ISAs, but we've only had the £20k limit for a few years. For a long time it was only £3,600. A low AE would mostly impact upon older people who started investing many years ago when the ISA limit was low, or even earlier before ISAs existed. They're the ones who need the current AE the most. The direction of travel now is to let people make a bit of money from their savings without paying tax, so bringing in a low AE would be a retrograde step.

What exactly is it about "the world today" (as opposed to the world yesterday) which makes it sensible to lose the distinction between income and gains? What has changed? Of course, we all know Covid-19 will change the tax landscape, but I suspect you were making a wider point here.

As for inflation, income tax is not much affected by this. Your salary this year is worth pretty much the same as it was last year. Not so capital gains. Many of them go back to the 1980s when inflation was around 15-20%. No, banks do not give you an inflation allowance, but interest rates tend to go up when inflation is high. The same goes for shares. As the price of everything goes up, so do asset values. This affects the share price. In real terms, however, everything else being equal, the shares are worth much the same as before in terms of pure purchasing power. Why should people be taxed on gains they haven't really made? In attempting to align the taxation of income and gains, you're effectively taxing gains more.

As for the ER lifetime limit, you might as well ask why we had retirement relief. I suppose it was because governments saw it as right and proper. Self-employed people could either invest their profits in a personal pension or plough them back into their businesses. They obviously wanted to encourage people to invest in their businesses. I suppose it depends on your political instincts. Those on the Left tend to want to tax everything. Those who aren't tend to see the benefits to the economy of not taxing people to death.

You seem a bit hung up on DIY builders. There can't be that many cheating the system I'd have thought, not enough to start messing about with PRR anyway. This relief would not be given if no one considers it appropriate. It may be taken when it shouldn't be, but that's not the same thing. If you mean tax tribunals have been allowing PRR when you think they shouldn't, don't forget they have all the facts to hand and plenty of case law to refer to. Who is more likely to be right?

There are plenty of ways to discover tax evasion on this front. Land Registry records for a start. Do we all have to start filing CGT returns every time we move house now, just for the taxman to decide if PRR was due or not?

There may be some merit in requiring minimum periods of occupation, as the present rules are as clear as mud. I've lost count of the number of clients who've asked me how long they need to live in a property for it to qualify for PRR, but as any tax advisor will tell you, it is the quality of the occupation that counts rather than the duration (although clearly that affects the quality) and also the intention and motivation of the taxpayers when they moved in. These are all subjective judgements that vary from case to case, and each case is different in its own way. If we try to shoehorn this relief into a fixed set of rules, it may provide certainty but it will also lead to many unfair outcomes.

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Replying to cfield:
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By whitevanman
24th Jul 2020 17:28

With respect you seem to be showing the same mis-understanding that one or two FTT judges have, as to the scheme of tax and particularly its origins.
If you go back before the 1980's, the world was a different place. Generally speaking, the vast majority were employees (jobs were in abundance) there was a small(ish) number of self-employed and a very small number of companies, most of which were public. Few people had money to save and certainly the stock market was entirely unheard of for the vast majority. One could also comment about the establishment attitude to different "classes" which influenced policy (still does).
When someone first got a job they filled in a tax return. Based on that, HMRC would then decide whether they should be noted for an annual return or whether it would be noted for one in a further 5 years. No-one escaped. To complement this there was S7. This meant that if someone's circumstances changed, they were obliged to tell HMRC who would then be able to decide on further action (often issuing a tax return).
At the time, a person could be noted for an annual return if he had as little as £5 untaxed interest.
Against that background, ask yourself why the CGT AEA was set at £1,000. Certainly it was a more worthwhile sum than the £5 untaxed interest.
The main reason given was to avoid large numbers having to notify small gains, which could arise on a wide range of assets. No-one was bothered about limiting the number of annual returns as such (as explained above). There were undoubtedly some other reasons that contributed to the figure being set at £1,000.
There is clearly no ground for an AEA of a greater amount, especially given other changes in rates etc.

I note that you persist in referring to the "millions of people" who would be drawn into the tax net but again you offer no evidence of such. Certainly there is no evidence I am aware of that would support this. Increasing it to the current rate certainly didn't remove millions (of people) from the tax net.
Again, you miss the point about inflation. If I get a pay rise it is likely to be no more than the rate of inflation. My salary is therefore worth no more. However, I pay tax on that rise. Why should it be different for capital, whatever the period over which it has risen? The arguments in favour of indexation are just not proven.

As to ER, this clearly does not do what you suggest. As I have said, it would be fine as an alternative to pensions relief. That is not the case. It covers almost any disposal and many schemes have been seen which seek to take advantage of it. What is the value (to the rest of us) of allowing a shareholder to sell some shares to a family member and avoid paying a chunk of tax? It is nothing to do with investment in the business; on the contrary it is usually about taking money out.
If the relief is to continue, it should be linked to retirement, fully, from the business, at the same age as everyone else can retire and should only be available if they have not already taken advantage of relief for pension contributions.

I am not "hung up" on DIY builders. If you read this site you will see that on the day this post appeared, there was also a report of the Hashmi case. Read it and you will see the problem. As clear a case of cheating as you could wish to find and we, the taxpaying public, have had to pay for HMRC to take such a ridiculous example to tribunal. The prisons may be full but I would make space for people like this. It is an exception in that HMRC won. You have explained in your own post, why the current situation favours the cheats (how do you disprove intent? It has to be a very clear cut case). This is why, I say, there is a need for tighter rules which give far greater clarity, make it simpler for the majority and avoid the need for protracted enquiry and tribunal work by HMRC, for which we all have to pay.
Again, no-one knows how many properties are sold and on which tax might be due. There has certainly been a proliferation of TV programmes looking at "developers"etc in recent years and a lot more people looking to property as a means of investment (or whatever). There are about 14 million homeowners/households and about 1.2m house sales per annum. Statistics show the average person spends 21+ years in their home. That would suggest there should be, say, 750,000 sales a year. So what explains the other 500,000?
Clearly there are a very large number of potential "avoiders" (but of course we don't know how many sales are actually reported either as trading or CG). If we assumed say, half are correctly reported and the average profit is £20k, that would mean about £500m of unreported profit annually. Not to be sneezed at. Of course it is just speculation but it is food for thought and possibly a good reason to look a little closer at the rules.
I would emphasise again that the over-riding purpose behind my posts on this are to indicate some of (what I see as) the problems with the current system and why it needs a complete overhaul. But, it is no use just tweaking what we have. That way lies further complexity and confusion.
What is needed is a full review looking at the many reliefs etc to decide which remain valid, which should be changed and which, thrown out.

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Replying to whitevanman:
By cfield
25th Jul 2020 13:28

whitevanman wrote:

With respect you seem to be showing the same mis-understanding that one or two FTT judges have, as to the scheme of tax and particularly its origins.


So what exactly was it that the FTT judges misunderstood?

whitevanman wrote:

There is clearly no ground for an AEA of a greater amount [than £1,000], especially given other changes in rates etc.

But there is. Back in the early 70s, £1,000 was worth roughly 12 times as much as it is today. The AE has merely kept pace with inflation.

whitevanman wrote:

I note that you persist in referring to the "millions of people" who would be drawn into the tax net but again you offer no evidence of such. Certainly there is no evidence I am aware of that would support this.

I must confess, I didn't go out and do statistical research or in-depth studies on this just for an Accountingweb post, but I'm talking about millions of people over several years, not just one. Lots of people own shares now. It's not just a minority. With an AE of just £1000, nearly all of them at some point or other would have to sit down and work out whether they need to do a tax return. It would be a huge waste of time, an unconscionable burden and a source of stress and worry too.

whitevanman wrote:

Again, you miss the point about inflation. If I get a pay rise it is likely to be no more than the rate of inflation. My salary is therefore worth no more. However, I pay tax on that rise. Why should it be different for capital, whatever the period over which it has risen?

It depends on whether your pay rise keeps up with inflation post-tax or pre-tax. You also ignore the fact that increases in the personal allowance tend to keep up with inflation (more than keep up over the last few years). If you are going to treat gains the same as income, the AE should rise too. Back in 1973, the single person allowance was just £595 so the AE was two-thirds higher. When it went up to £3k in 1980, the SPA was just £1,375 so it was 2.18 times higher. Now it is roughly the same as the PA.

The biggest flaw in comparing gains to income, however, is that gains tend to be realised after several years for most private investors. The ravages of inflation are therefore magnified. Also, don't forget that investments are made out of income that has already been taxed, so it really is perverse to tax paper gains that only arise due to inflation. It is, in effect, double-taxation.

If we were to scrap CGT and apply income tax to gains, the PA would have to go up to compensate, but this would lead to a tax loss as most people don't have gains (especially now the ISA limit is much higher) so non-investors would all benefit from the reforms, costing the Treasury billions, whilst investors would suffer. It would also lead to capital losses being deductible against income, unless they try to have their cake and eat it by excluding losses. Doesn't sound a good idea to me.

It's a fundamentally flawed idea anyway, as most gains aren't income in disguise.
They are a reward for taking a risk with your savings. Quite different in nature from earning a living. They need to be taxed differently, and dare I say it, they should be taxed more lightly, as we should be encouraging savings/investment.

whitevanman wrote:

As to ER, this clearly does not do what you suggest. As I have said, it would be fine as an alternative to pensions relief. That is not the case. It covers almost any disposal and many schemes have been seen which seek to take advantage of it. It is nothing to do with investment in the business; on the contrary it is usually about taking money out.

Let's bring back RR then. As I said, ER was Darling's stupid idea, made worse by Osborne raising the lifetime limit to ridiculous levels. But in the absence of RR or business asset taper relief, it is the best we've got. As I also said, there are plenty of ways to counter abuse without scrapping the whole thing.

whitevanman wrote:

I am not "hung up" on DIY builders. You have explained in your own post, why the current situation favours the cheats (how do you disprove intent?). This is why, I say, there is a need for tighter rules which give far greater clarity, make it simpler for the majority and avoid the need for protracted enquiry and tribunal work by HMRC, for which we all have to pay.

Tighten the rules by all means, but if we force people to do totally unnecessary CGT returns when they move house, it will put an unconscionable burden on the public, lead to thousands of extortionate penalties for not doing them and it wouldn't even stop tax evasion as a) the real cheats simply wouldn't do them, and b) HMRC don't have the resources to review them all anyway.

whitevanman wrote:

What is needed is a full review looking at the many reliefs etc to decide which remain valid, which should be changed and which, thrown out.

All taxes should be constantly reviewed, but what annoys me is blatant tax grabs being made under the guise of simplification. It's just so cynical. What do we need to simplify anyway? PPR is simple enough for most people to understand. The AE is not confusing in the slightest. Everyone gets the same. The higher rates for residential property? As we know, that's politically motivated. Rollover relief and holdover relief? Gift Relief? Incorporation relief? They all have specific purposes. The reliefs for chattels and foreign currencies are sensible and avoid the need to report insignificant gains. The EIS and SEISS exemptions are there to encourage investment. The rules on shorthold leases, share pooling, market value, clogged losses, etc, are all there for good reasons.

What do we really gain from simplification? We'll only end up having to bring in new exemptions or rule changes to cater for unfair outcomes. As I said, the best way to simplify the tax system is to automate it and reduce the number of tax returns as much as possible. That way, there is nothing for people to get confused about.

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Ivor Windybottom
By Ivor Windybottom
23rd Jul 2020 09:06

Hey don't worry... what have the OTS ever done for tax simplification!??!

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Replying to Ivor Windybottom:
By cfield
23rd Jul 2020 09:37

They got rid of tax relief on luncheon vouchers. Now we don't have to worry about that 15p ever again!

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By adam.arca
23rd Jul 2020 12:55

I’m instinctively with cfield when he opposes reform on the basis that it never does what it says on the tin and that we could all do with a bit of certainty. That said, CGT is a mess and really does need a proper review (as opposed to an OTS review which is always just so much fannying around the edges).

I would say that what the UK really needs is to decide what sort of tax base it really wants. Do we want a tax base which looks at expenditure (and should therefore major on VAT, duties etc and should retain IHT as a form of “spending”) or do we want one which taxes income and profits (so, IT, CT and CGT)? Or do we just muddle along taxing everything a little bit whilst observing the principle of maximum plucking for minimum sqauwking?

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By adam.arca
23rd Jul 2020 13:09

As to my own detailed wish list of CGT reforms:

Re-introduce indexation (and re-basing to say 2000?) and that way CGT can have the same marginal rates as IT. Otherwise, cash-strapped chancellors are going to be tempted to continue attacking the “low”rates and taxing inflationary profits.

Abolish the direction of travel towards taxing gains as they arise and leave this as the job of an annual tax return (dreaming, I know).

Massive reduction in AE and possibly base exemption on size of proceeds: I just fail to see the justification for the AE but there obviously has to be some trade-off to avoid pulling small gains into the system.

Reluctantly (because it may be opening Pandora’s box), I think PPR needs to be looked at because it is being abused and is distorting the market as builders and developers have cottoned on to the tax-free aspect. My suggestion would be that PPR gains are only tax-free after say 5 years of residence with a sliding scale before that.

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Replying to Joe Soap:
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By North East Accountant
24th Jul 2020 11:24

I remember the Community Charge (or Poll Tax) (in fact I have the bill for 1990/91 in my desk drawer).

In theory, a good idea, but people didn't like it one bit and it lead to Mrs T's downfall.

I can't imagine any politician who wants to get voted back in ever going for this.

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Replying to Joe Soap:
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By whitevanman
24th Jul 2020 22:13

There really is something beyond irony in a former banker telling us that the way to meet the bill is by taxing everyone's PPR. The reasons against it are too obvious to mention.
What I also find (mildly) amusing is that part of the reasoning behind the suggestion was that, without some such move, the cost would fall on our children. Whose inheritance does he think is going to be seriously reduced? Also, it will take 25 years to collect £400bn. I suspect many of us will not be around in 25 years and again, the children will be the ones left to pay. Still, it wouldn't affect said bankers would it.

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Replying to whitevanman:
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By Joe Soap
25th Jul 2020 07:46

For starters I have agreed with much of what you have said here.
But hang on. This thread started as being about the simplification of CGT and that sort of moved towards taxing capital gains at the same levels as income is taxed, with the removal of PPR being an element of that change.
You say that this would mean that the tax was paid by our children, meaning that their inheritance will be reduced by the amount of CGT paid.
This is correct but actually your estate will be all of the assets you have accumulated in your lifetime less all of the tax you have paid and all of the money you have spent.
So would you argue that all of the tax you pay is borne by your children?
The fact that some tax is not paid until you die does not make it any more "paid by your children" than tax paid when you are alive and well.
Who is paying for your next pint or G&T ?

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Replying to Joe Soap:
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By whitevanman
25th Jul 2020 09:44

The linked article suggested taxing PPR disposals to raise £400bn over 25 years and pay for the current crisis. It offered the justification I have referred to. It also talked about this replacing IHT. So presumably he intends taxing the disposals on death. The inevitable loss is to the next generation(s).
Also, our children no doubt will aspire to own their own property and move up the ladder, as we have. But they will be taxed.
The calculation suggested the £400bn would be raised over 25 years but I would assume it would continue beyond that (it's hardly a one-off). Our children could be in their 40's (or older) by then. So, i do think it is a measure that would affect the young far more than the old and whilst I don't, generally, agree with that type of simplistic nonsense, it was the author of the article that used it as justification for his latest great idea.
Incidentally, given the effects on the hospitality industry, my next pint (glass of red) may be the only thing to escape a tax grab. Oh no, I am obviously still dreaming.

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By pauljohnston
29th Jul 2020 12:12

Many interesting points . PPR this could be managed by making the claimant reside in the property for say five years, below that would have to be put in a form of a case to HMRC in a form they require.

The problem with property in the UK is that there is a shortage and thus a big chunk of our incomes are used to buy them. Conversely my brother who lives in north Carolina moved 10 years ago. He recently forwarded a copy of the agents particulars for his "old house". Sale price was $500 more than he had sold it 10 years previously at $100,000.

Solve this problem and PPR exemption problems largely disappear.

I suggested elsewhere that taxing gains can mean that investors invest in tax exempt items wine cars etc but we need investors to buy shares etc to make funds available for industry. So maybe the way ahead is to tax short term gains as income and those who hold assets for more than XX years pay no capital gains tax.

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Replying to pauljohnston:
By cfield
29th Jul 2020 14:20

That's exactly what we used to do. It was called Taper Relief, but Darling scrapped it because private equity managers were "paying less tax than their cleaners" and introduced ER instead, which benefited them even more.

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