- If the government did look at aligning rates, it should also consider:
- reintroducing a relief for inflationary gains;
- allowing a more flexible use of capital losses; and
- looking at how family investment companies could be used for future tax avoidance.
- If the government wants to make it easier for taxpayers to understand and predict their own tax liabilities, it should reduce the number of rates and the extent to which liabilities depend on the overall income of taxpayers and the extent to which they straddle the various bands.
- The government should further investigate whether employees’ and owner-managers’ rewards from personal labour (as distinct from capital investment) are treated consistently and consider taxing share-based employment rewards and some retained earnings in smaller companies at Income Tax rates.
2) The Annual Exempt Amount
The current annual exempt amount for CGT is £12,300.
The data provided by HMRC to the OTS showed that, after allowable losses, 263,000 people reported gains for the 2017/18 tax year and it is thought that 50,000 people had net gains just below the threshold.
It is for the government to decide what the policy objective of any threshold is but the annual exempt amount has been described over time as one or more of the following:
- an administrative de minimis, to reduce the number of people who have to submit information and tax returns
- a broader more substantive relief, comparable to the Income Tax personal allowance
- a blunt tool to compensate for inflation
Respondents to the OTS’s call for input agreed that the threshold was currently too high to be a true administrative de minimis and it was currently acting more like a relief. This would typically be true among advised clients, who will find their adviser or investment manager using their CGT allowance each year where appropriate within their portfolio(s) as part of their annual review.
When the threshold was originally introduced by Nigel Lawson in 1982, its objective was to act as compensation for inflation. However, the OTS view this is an inefficient way of achieving that policy objective when it does not consider holding periods or asset values.
OTS recommendations
- If the annual exempt amount is intended to act as an administrative de minimis, it should be reduced.
- Along with a reduction in the exempt amount, the government should simplify the rules surrounding personal effects and, crucially, to combat the extra admin and cost burden of bringing more people into self-assessment, significant efforts should be made to bring in a real time capital gains service, linking information from investment providers and platforms to the online Personal Tax Account.
3) Interaction with lifetime gifts and IHT
It is perhaps not surprising that the OTS focuses on the interaction between CGT and IHT as in 2019 they published similar reviews and reports on IHT.
CGT is not payable on unrealised gains when someone dies.
If the assets are inherited, then the new owner is given the market value as at the date of death to use as the ‘new’ acquisition cost. Any previous increase in value (or loss) is wiped out - often referred to as the capital gains uplift.
This capital gains uplift not only applies to investments and shares, but also business property, farms and residential property.
Gifting assets can also attract CGT in the same way as the sale or disposal of an asset.
Although some business assets already benefit from relatively favourable treatment through Business Asset Disposal Relief (formerly Entrepreneurs Relief) or Gift Holdover Relief, the capital gains uplift on death is still more generous than both.
It has been suggested to the OTS that it would simplify decision-making around succession if there were no capital gains uplift on death. Notwithstanding the inheritance tax implications, people would be able to decide how and when to pass on their assets without the uplift influencing their decision-making.
OTS recommendations
The OTS considers that, at present, the way IHT and CGT interact is incoherent and distortionary. There have been three further recommendations for the government in this area.
