Proposals to "simplify" the CGT regime in the UK are giving some private client advisors heartburn over concerns that - as all too-often can be the case - the move will mean that the tax net widens. An organisation advising the Treasury has advocated a range of changes to the CGT system.
Proposed reforms to the UK’s capital gains tax system have come under fire after claims that they could triple the number of people who pay it.
Yesterday the Office of Tax Simplification – a body advising the government on tax – called for a rise in rates and cuts to personal allowances. The recommendations come at a time when financial service industry figures fear that the UK will hit savers to help pay for the debt caused by the global pandemic.
Rishi Sunak, Chancellor of the Exchequer, has the unenviable task of trying to raise revenue to curb debt without at the same time choking off any economic recovery as and when lockdowns end. The current CGT system, for example, operates so that if a person is a higher rate taxpayer, they pay 28 per cent on gains from residential property and 20 per cent on gains from other chargeable assets. A number of annual allowances apply. Over the years, governments have tweaked rates and allowances, often with the ostensible aim of fostering entrepreneurship, such as among start-ups and small businesses.
Tax and advisory firm Blick Rothenberg said the OTS proposals were “dangerous”.
“The standout headline is the proposal to simplify CGT by aligning it to income tax rates. Is this really simplification, when the income tax system itself is complicated with various spikes and cliff edges in play? This is just a roundabout way of presenting an increase to CGT,” Nimesh Shah, chief executive at the firm, said. “I am disappointed by the conduct of the OTS in its handling of this review, which only serves to increase the tension around higher taxes, when it should be aimed at simplification.”
“The OTS is straying into matters of tax policy rather than recommendations on simplification. The proposals contained in the report serve to complicate the existing CGT regime, rather than simplify it. Some of the areas that would be open to simplification, such as the computational aspects and operation of certain reliefs (such as main residence relief), are not considered in any detail,” Nimesh continued.
“The other [CGT] proposals include reducing the annual exemption, abolishing Business Asset Disposal Relief (the £1 million successor to Entrepreneurs’ Relief introduced in Rishi Sunak’s first budget) and Investors’ Relief, as well as removing the Capital Gains base cost uplift on certain assets upon inheritance following a person’s death.
He added that latest government data showed that the Treasury raised £9.6 billion from CGT in 2018/19 against capital gains of £62.4 billion. He said takings from CGT represent only about 1.5 per cent of total receipts. Nimesh argued that the simplest CGT regime would be a single flat rate – which is what operated in 2008/9 under the Labour government of the time – when the rate was 18 per cent. At present, there are five different rates which can apply.
One of the many media reports yesterday – from the Daily Telegraph – claimed that if the OTC recommendations are adopted, “hundreds of thousands of additional taxpayers paying higher rates of tax on profits from selling investments and second homes.”
“The direction of travel has already been to remove a generous CGT regime with the lifetime allowance for entrepreneur’s relief being reduced from £1 million to £10 million in March of this year,” Rebecca Fisher, Partner in the private client team at law firm Russell-Cooke, said. “The recommendations do not come as a surprise. There is going to be a big COVID-crisis bill to pay for and increasing CGT rates is unlikely to have any significant impact upon opinion polls or future elections. The Treasury is likely to consider the recommendations as a ‘no-brainer’ although this must be balanced with the possibility of individuals bringing down the shutters and holding on to their assets. This would reduce overall tax revenues because of the unattractive rates of capital gains tax that may become payable.”