Review of capital gains tax

The Chancellor of the Exchequer, Rishi Sunak, has asked the Office of Tax Simplification (OTS) to carry out a review of capital gains tax (CGT). A scoping document sets out the scope of the review. The review will consider CGT and the taxation of chargeable gains in relation to individuals and smaller businesses and develop recommendations for simplification from both an administrative and technical standpoint affecting individuals, partnerships, and unincorporated or single entity owner-managed companies, as well as reviewing areas where the present rules can distort behaviour or do not meet their policy intent.

Since the focus is on smaller businesses and individuals, the review will not extend to issues specific to corporate groups, such as substantial shareholding exemption, company reorganisations or demergers.

As well as looking at the overall scope of CGT and the various rates which apply, the scoping document sets out a number of specific areas to be considered by the review, including:

• the reliefs, exemptions and allowances and the treatment of losses;
• the annual exempt amount and its interactions with other reliefs;
• the position of individuals, partnerships and estates in administration;
• the position of unincorporated businesses and stand-alone owner-managed trading or investment companies, including the setting up, selling or winding up of such businesses or companies;
• any distortions to taxpayers’ personal or business investment decisions;
• interactions with other parts of the tax system, especially the boundary between income tax and CGT in relation to employees; and
• clearance and claims procedures.

The OTS has now published a call for evidence including an online survey. The evidence gathering process is to be split into two stages: the first seeks high-level comments on the principles of CGT by 10 August 2020; and the second and primary section invites more detailed comments on the technical detail and practical operation of CGT by 12 October 2020. The earlier deadline for comments on the principles of CGT is designed to help shape the work of the OTS on the detailed issues. It is expected that the OTS may publish more than one report on its findings as a result.

Comment

CGT has undergone more than its fair share of structural changes over the course of the last 30 years. Indexation relief, taper relief, differing treatment of business and non-business assets have all come and gone, replaced by the current system with lower rates (generally 20 and 28%) moderated with a series of reliefs for business owners and investors and home owners.

It is unclear at this stage whether the current review will result in another significant shake-up of CGT, but there are clearly risks for taxpayers. In the wake of the COVID-19 pandemic, there may be a temptation for the government to seek to increase the tax take from CGT – albeit that the tax currently contributes a modest amount to the Treasury. Both the annual exempt amount and the tax rates (CGT was historically taxed as the top slice of a person’s income) may prove easy targets for the government in this context. In particular, the current rates of 10/20% (and 18/28% applied to returns on residential property and carried interest) could be significantly increased by a return to taxing gains at an individual’s top rate of income tax. And the currently generous annual exempt amount could be scaled back to a much lower figure (similar to that for the dividend exemption) to ease administration.

It is also worth noting that a potential return to a higher inflation economy (when taxing gains without some form of indexation allowance amounts to taxing people on inflationary gains) may suggest that the merry-go-round may be turning back in the direction of requiring some form of indexation allowance/taper relief or equivalent measure – despite the fact that this would be the opposite of simplification.

However, the review is at a very early stage and should the government be minded to increase the tax burden in the wake of the COVID-19 pandemic, then it would need to do much more than look at the rates of CGT.