"Other proposals, such as scrapping CGT uplift on death, have far reaching consequences and need to be considered carefully."
In July 2020, the Chancellor asked the OTS to carry out a review of Capital Gains Tax, 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’.
In particular, Rishi Sunak asked for a review of its use in "the acquisition and disposal of property" and "the practical operation of principal private residence relief".
Blick Rothenberg described the review as an "inevitable tax raid" to recoup some of the money spent during the Covid-19 lockdown period, describing the potential changes as "bad news for investors".
In the 2016 Budget there was a drop in CGT, apart from on property, where the 18% rate dropped to 10% and the 28% rate dropped to 20%.
The first report found "many features of Capital Gains Tax which can distort behaviour, including its boundary with Income Tax and interconnections with Inheritance Tax".
The report said that "more closely aligning Capital Gains Tax rates with Income Tax rates has the potential to raise a substantial amount of tax for the Exchequer".
A second report, which will follow early next year, will explore key technical and administrative issues.
Rachael Griffin, tax and financial planning expert at Quilter, commented: “Chunky reports from the government aren’t known to be produced at speed unless there is a real requirement. The OTS itself acknowledge the consultation has been produced in a shorter timeframe and this hints that change to CGT will be on the cards as the Chancellor looks to counteract the escalating deficit caused by the pandemic. The appeal of changing CGT is clear - only a relatively small number of people pay it. Statistics show that over the course of a decade around 1.5 million people reported taxable gains, far lower than the numbers paying the biggest taxes like income tax and national insurance. It means the tax can be reformed in order to squeeze asset owners, shareholders and landlords without impacting the majority of people.
“It is also a tax that is almost exclusively paid by older, wealthier households. According to the OTS, 97% of CGT tax revenue is paid by over 35s, with most people caught by the tax in their 50s and 60s. It means that raising additional revenues can be positioned as a tax on those with the broadest shoulders.
“The OTS has suggested a package of reforms, some of which are tweaks around the edges that will be relatively quick wins and some which will cause a bit of a stir. The prospect of bringing CGT in line with income tax has been touted for some time and so that is relatively unsurprising, although it would lead to a significant rise in tax paid by those subject to CGT. And simplification is again at the heart of the OTS’ report, which suggests that there be two rates rather than four.
“Other proposals, such as scrapping CGT uplift on death, have far reaching consequences and need to be considered carefully. One of the biggest challenges of tinkering with the CGT system is its interaction with several other parts of the tax system, in particular inheritance tax, so many changes can be complex and have knock-on consequences for other parts of the tax system.
“CGT uplift means that CGT is overlooked when an individual dies and they hold taxable assets that have gone up in value. This is because when the assets are transferred to someone else, normally a spouse or family member, they are ‘re-set’ for CGT purposes. Instead, the assets may be subject to Inheritance Tax. The OTS recognise that this is means that people are often holding onto assets until they die for the tax benefits. Removing or limiting this relief could be seen as a way to encourage wealth transfers to happen earlier, as well as raising significant funds.
“The OTS also suggest lowering the annual exempt amount. Their view is that while small gains should still be exempt in order to avoid administrative hassle for the sake of a minor tax bill, the current allowance results in too many profits being tax free. Cutting it to around £5,000 could see the number of people paying CGT each year doubling. Although the OTS do not acknowledge the variety of assets that are notably free of CGT such as lottery wins, classic cars and vintage wine. This may raise some eyebrows as they seem like easy areas to target the wealthy if that is indeed the government’s goal.
“In general the message is clear from the government and the OTS. Use your allowances now or lose them. Changes are on the horizon and why it is not suitable for everyone to change their financial plans because of mere policy speculation it is worth your while to review in light of what will inevitable be a more harsh tax environment. Financial advice is critical for anyone wrestling with all the different rules and considering changes.”
