Last July, Chancellor Rishi Sunak commissioned a report from the Office of Tax Simplification into Capital Gains Tax (CGT) saying that the current approach was counter-intuitive and creates opportunities for tax avoidance ...
Firstly, the difference in rates of Capital Gains Tax and Income Tax is creating a distortion in both business and family decision making. It creates incentives for taxpayers to organise their affairs which turn income into capital gains, therefore paying a lower rate of tax via CGT.
The OTS suggested aligning the rates of CGT and Income Tax would eliminate the need for a complicated set of rules to police the boundaries between the two. The OTS believes the Chancellor could raise an additional £14 billion a year.
Secondly, the OTS suggested that annual exemptions were too high, which can distort any investment decisions. With people reporting net gains just below the CGT threshold, this threshold should be reduced to just £5,000 which would mean the number of taxpayers required to pay CGT would double and triple if it was cut to £1,000.
Because of the increased administrative costs that arise from the threshold cut, the OTS suggested that the rules around personal effects should be simplified and the thresholds for reporting adjusted if no gains arise.
Thirdly, the OTS say that Captial Gains Tax interacts with Inheritance Tax (IHT) is quite incoherent. CGT apparently incentivises asset owners to transfer business and personal assets on death rather than during their lifetimes.
The OTS says that taxpayers should not get both an IHT exemption and a CGT death uplift, making transfers in both life and on death more neutral.
And lastly, the OTS says the Government should review the extent to which CGT reliefs can be used to stimulate business investments. They say that Business Asset Disposal Relief is mistargeted and investment incentives should apply when the investment is made.
The Government needs to decide how it will incentivise business investments whilst being fair to individuals, and there are many interactions with the taxation of companies and trusts that need to be looked at.
As the Government is dealing with the Coronavirus pandemic right now, it seems that the Chancellor is going to create a thorough and wide-ranging budget when things calm down a little. After all, with the amount of spend supporting both individuals and businesses throughout COVID, increasing tax revenue is an easy way to reduce the debts.
Simplifying Capital Gains Tax is an easy win for the Chancellor.
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