Chancellor of the Exchequer Rishi Sunak has asked the UK’s Office for Tax Simplification (OTS) to undertake a review of the country’s capital gains tax (CGT) rules.
It will encompass how the regime applies to both individuals and small businesses, Sunak’s outlined in a letter to the department.
He added: “This review should 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, I would be interested in any proposals from the OTS on the regime of allowances, exemptions, reliefs and the treatment of losses within CGT, and the interactions of how gains are taxed compared to other types of income.”
Aligning CGT and income tax rates
Tom Selby, senior analyst at AJ Bell, said that the timing of issuing such a review could spark fears of a “CGT raid” at the autumn budget later this year, with a possible rise in taxes.
“A quick look at the numbers gives us some idea of why CGT might be in the Treasury’s crosshairs,” Selby added.
“While chargeable gains subject to CGT after losses, but before the annual exempt amount, were £57.9bn ($73bn, €64.6bn) in 2017/18, total CGT liabilities were £8.8bn – implying an average tax rate of just 15%.
“Given those who pay CGT are twice as likely to pay higher-rate income tax, [set at 40%], as taxpayers generally, the Treasury may have its sights set on aligning CGT rates and income tax rates.
“CGT rates are currently set at 10% for basic-rate taxpayers and 20% for higher and additional-rate taxpayer – 18% and 28% where gains relate to residential property.
“Such a shift could both simplify the system and raise tax revenue – particularly if the annual exempt amount, currently set at £12,300, is either slashed or abolished altogether.
“Any attempt to attack CGT would inevitably face stiff resistance from Conservative backbenchers. However, with the Treasury needing to raise funds to pay for its covid-19 response and a huge parliamentary majority, the government may feel CGT cuts are among its least-worst options.”
First IHT, now CGT
Neil Jones, technical services manager at Canada Life, said that CGT could receive the same treatment inheritance tax had when it was reviewed.
He told International Adviser: “Is it a coincidence that we are waiting to see what tax rises the Chancellor of the Exchequer is considering in the wake of the covid pandemic, and this review has been announced?
“Simplifying a tax regime is always a good thing. This may not reduce the amount of tax paid by individuals and businesses, but if the administration of a tax can be made easier, then it is good news.
“Just like inheritance tax, there are a great number of forms and declarations that are needed to administer this tax and with the aim of making tax digital and having this all available and reportable online would make it easier and reduce work anyway but changing the system could introduce many advantages.
Many questions
But what actually is the Treasury looking to achieve, Jones asks.
“Many people look at the spending of the government and this regularly comes under scrutiny and occasional criticism, however, the various exemptions and reliefs generally escape this, but they do have a cost to the Treasury.
“One of the original objectives of CGT was to catch the income that falls outside of the income tax regime, which it still does; however, it taxes it at half the rate with an additional allowance to that which applies to income tax; the annual exemption.
“This could be something that the government looks at and would have a direct impact on investors.
“The treatment of losses is also brought into the review. Currently, any losses can be carried forward indefinitely and can be offset against gains many years in the future.
“Do the Treasury think this is too generous and should a time limit be put on this or could the losses taper over a period of time?
“I expect a lot of respondents will argue for increased or more effective exemptions and allowances but, in reality, is this the Treasury looking at the tax and what areas work effectively and what doesn’t, or looking at the potential impact of any increases?
“In my opinion, capital gains tax could play a key part in potential tax increases to help cover the cost of the covid pandemic. The issue with capital gains tax, for the government, is that the tax generally arises when someone disposes of an asset, if there is no disposal then there is no tax liability generated.
“This doesn’t help tax revenues,” he added.
‘Compelling case’
Nimesh Shah, a partner at tax and advisory firm Blick Rothenberg, said that the simplification of the system may come hand-in-hand with tax rises because CGT, together with inheritance tax, make up a very small fraction of the Treasury’s revenue.
“After all the good news at last week’s Summer Statement, this is probably an early indication from the chancellor that CGT is the first tax set to rise. There has been significant recent speculation that the main rate of CGT of 20% is set too low, and some have suggested that it should be aligned to the income tax rates, up to 45%.
“There is a very compelling case for tax reform and simplification generally. There are five different CGT rates which could apply for an individual realising a capital gain – 0%/10%/18%/20%/28%.
“There is a good argument to say that there should be a single flat rate of CGT.”
He added: “There is also an argument to abolish CGT, and inheritance tax, completely – the taxes combined raise less than 1% of total tax revenue for the Treasury, but there is significant cost of administration for HMRC to manage the collection of the tax.”
End of a cycle
As part of the review into CGT rules, the government has unveiled a consultation asking industry players their view on “which aspects of capital gains tax are particularly complex and hard to get right, and to hear any suggestions for improvements”.
According to Tim Sargisson, chief executive at Sandringham Financial Partners, capital gains regimes tend to change every decade, and this might just be one of those moments in time.
He told International Adviser: “As we have seen since 1965, taxing capital gains is one area of the tax system that it is difficult to get right.
“Changes to CGT tends to run in 10-year cycles, so we are probably due a change.
“However, we will have to wait and see as to what is proposed and whether we can look ahead to a simpler system which ultimately stands the test of time better than its predecessors.”
