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  • Katherine Bullock

Running to keep up – The OTS Report Part 1 – CGT changes and the season of giving?

Earlier this year, the Office of Tax Simplification (OTS) was asked to consider CGT and what could be done to make the regime simpler, and in particular to identify areas “where the present rules can distort behaviour or do not meet their policy intent”. With over 1,000 responses to an online survey, almost 100 emails and 22 consultation meetings, the report divided opinion on what ought to be done, if anything, and on whether the OTS was overstepping its remit. Nevertheless, the OTS pressed on and on the 11 November 2020, they released the first of two planned reports on the subject. This one covers “policy design and principles underpinning the tax”, and the second planned for early next year will cover “key technical and administrative issues”. The result unsurprisingly is much speculation on what these recommendations might mean for a Spring 2021 budget.

" the era of sweeping, unexpected changes, there is no such thing as being too prepared..."

Firstly, the report notes the fairly obvious fact that the rate of CGT being almost half that of Income Tax ‘distorts’ decision-making and heavily incentivises taxpayers to realise capital gains rather than income. To ‘solve’ this problem, the report suggests more closely aligning the rates of Income Tax and CGT. This carries the obvious risk of discouraging economic activity – people might just decline to sell their capital assets at all to avoid having to pay tax on them. In light of this conundrum, the OTS also suggests that the number of different rates of CGT could be reduced, gains could be averaged across their ownership period, an indexation allowance could be introduced, and losses could be used more flexibly. The boundary issues with other taxes could also be reduced, for example by ensuring that employee share incentives, particularly growth shares, are taxed as income. Individuals should also be discouraged from using companies to pay lower rates of corporation tax on their chargeable gains or accumulated earnings – a shot across the bows of family investment companies and personal service companies.

Next, the report examines the issue of the Annual Exempt Amount. The OTS suggests that as many as 400,000 people could be brought within the ambit of CGT by lowering the exempt amount. Whether this would actually accomplish an increase in the number of taxpayers or simply result in people selling fewer assets to stay under the new threshold is an interesting question. Regardless, the OTS also recommends that a lowered threshold should be accompanied by a reform of the chattels exemption to reduce the ways in which CGT can be sidestepped altogether. They suggest, as well, an improvement to the government’s real-time CGT reporting service, potentially requiring Investment Managers to report directly to taxpayers and to HMRC on the CGT liability of their activities. A lower CGT allowance is obviously a concern for anyone seeking to optimise their investment returns, and one would certainly hope that the government would improve its online systems before dramatically increasing the number of people forced to use them.

In one of the more controversial aspects of the OTS’s review, the report also addresses how CGT interacts with lifetime gifts and with IHT. Many of the professional bodies consulted raised concerns that overall policy decisions such as these were a matter for Parliament, and that the OTS was overstepping its boundaries by considering and suggesting changes along these lines. Nevertheless, the report goes on to examine the implications of following up on the OTS report on IHT’s previous recommendation of removing the CGT uplift on death. This would effectively add a CGT charge for those who sell assets inherited free of IHT, for example via the spouse exemption, agricultural relief or business relief. Instead, the OTS suggests that all assets be taxed based on their gains from the original date of purchase. This raises an issue for assets which have been held for an exceptionally long time. To counteract this, the OTS suggests rebasing to January 2000. Quite how that is intended to be a ‘simplification’ given the complexity of figuring out what any given asset would have been worth 20 years ago remains to be seen.

Last but not least, the OTS took a look at business reliefs. Acknowledging that how CGT reliefs are used to stimulate business is a matter of policy, they point out that in its current form, Business Asset Disposal Relief fails to promote entrepreneurial risk and investment. They recommend that it be refocused on providing more relief to business owners in retirement for whom their business functions as their pension and their only source of income in old age. The report bluntly suggests an end to Investors Relief as rarely discussed or used - harsh given that Investors Relief was introduced on 6 April 2016 and people are only just beginning to qualify. In light of these proposed changes, there would no longer be any relief explicitly targeted at encouraging risk-taking investment, and so it remains to be seen whether that is a viable policy direction.

In conclusion, this first tranche of the report spans over 130 pages. With a deficit of £billions to plug, it is certainly fair to be concerned that the Chancellor might be enticed by the report’s suggestion. However, raising capital taxes, without significant policy upheaval, also may mean taxing a Conservative government’s most reliable supporters for the budgetary equivalent of pocket change. Nevertheless, the report’s findings, in conjunction with the upcoming report on the technical aspects of the review, should be carefully considered. The OTS is ultimately an independent advisory body and given the nature of politics and the government’s priorities, it is difficult to say how much, if any, of this report will make its way into law in the future. That said, in the era of sweeping, unexpected changes, there is no such thing as being too prepared.


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