Office of Tax Simplification: First CGT review report
In July 2020 the Office of Tax Simplification (OTS) published a call for evidence seeking comments on Capital Gains Tax (CGT). The OTS requested initial comments, with more detailed comments to follow. On 11 November 2020 the OTS published their first report, which is on CGT policy design and the principles underpinning CGT. It takes account of the initial responses the OTS received. The second report has since been published and focuses on key tax technical and administrative issues.
This briefing note comments on the first OTS report. A note on the second report is available at here.
Chancellor Rishi Sunak asked the OTS to conduct a review of how individuals and small businesses are taxed on capital gains. The Chancellor specifically asked the OTS to “identify and offer advice about opportunities to simplify the taxation of chargeable gains, to ensure the system is fit for purpose and makes the experience of those who interact with it as smooth as possible”.
The OTS is considering the operation of the system of chargeable gain taxation as a whole including, at the Chancellor’s request, administrative and technical issues and areas where the present rules can distort behaviour or do not meet their policy objectives.
The OTS’ approach is that “a starting point for an efficient tax system should be neutrality, to minimise distortions to taxpayers’ business and family choices”. The OTS identified areas in which CGT is “counter-intuitive, creates odd incentives, or creates opportunities for tax avoidance”. The OTS make various recommendations (see below) and comment that there are strong interconnections between income tax, CGT and Inheritance Tax (IHT) and so all three taxes should be considered if and when changes are made.
The OTS consider one of the main sources of complexity to be the disparity between income tax and CGT rates. The OTS therefore recommend:
Capital gains within the annual exemption are tax-free (£12,300 in 2020/21 and 2021/22). The OTS are of the view that the annual exemption distorts investment decisions, and cite HMRC data showing that in the 2017/18 tax year around 50,000 taxpayers realised net capital gains close to the amount of the annual exemption. The OTS comment that they are mindful that one aspect of the annual exemption is that it provides an administrative threshold which reduces the number of people required to file tax returns with HMRC.
The OTS makes the following recommendations:
Capital transfers relates to transfers (e.g. gifts or bequests) where both CGT and IHT may be relevant. Depending on the circumstances, both taxes, neither tax or one of the taxes may be payable. The OTS make the following recommendations:
The OTS focus on Business Asset Disposal Relief (BADR – formerly entrepreneurs’ relief) and investors’ relief. Both reliefs provide a 10% CGT rate on disposals of assets where the requisite conditions are met. The OTS recommend as follows:
The OTS is an independent adviser to the government and makes recommendations for the government to consider. It cannot implement tax changes. The government have not indicated when they may respond to the OTS’ first report on CGT, or to a separate OTS report on IHT that was published in July 2019.
On 5 June 2021, the G7 finance ministers published a communiqué which sets out high-level political agreement on global tax reform.
Since 2017, the 135+ member countries of the G20/OECD Inclusive Framework on BEPS (‘the Inclusive Framework’) have been jointly developing a ‘two-pillar’ approach to address the tax challenges arising from the digitalisation of the economy. This led to the publication of two detailed ‘Blueprints’ in October 2020 on potential rules for addressing nexus and profit allocation challenges (‘Pillar One’) and for global minimum tax rules (‘Pillar Two’). The proposals were updated and simplified by the Biden Administration in April 2021, and formed the basis for the political discussions by the G7.
Find out more…
This note reflects the law in force as at 21 May 2021 and the OTS’ first CGT review report published on 11 November 2020. The report can be viewed at https://deloi.tt/32CPMNk. This note does not cover all aspects of this subject. To find out more about any aspect of the above, please discuss with your usual Deloitte contact. If you do not have a usual contact, please contact Michelle Robinson (firstname.lastname@example.org). For further information visit our website at www.deloitte.co.uk.