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Taxing gains: A review of the OTS report on capital gains tax

28 May 2021

Ola Adeosun, Partner

The second report on capital gains tax (CGT) has been published by the Office of Tax Simplification (OTS), with a significant focus on resolving issues and complexities in relation to the tax[1]. In the first report 'Simplifying by design', issued in November 2020[2], four strategic proposals were made to the government specific to the policy and design of CGT as it currently stands. To see a review of the key proposals from the OTS's initial report read our article The upcoming budget: what to expect.

In the second report, the OTS highlighted that there is currently a low level of public awareness about CGT and, emphasised that existing administrative systems could be improved to support tax payers in meeting their capital gains tax obligations. The report includes 14 recommendations to the government covering a wide range of areas; from moving house to getting divorced, running or investing in a business, to issues impacting on land transactions.

The recommendations have been grouped by the OTS into three key themes:  

Tackling issues that will make a long term difference

  • CGT is currently reportable in one of three ways; via self-assessment, UK property returns and real time capital gains tax service. The OTS proposes to bring all reporting formats into a single customer account, making it easier for the c. 500,000 people a year who pay CGT to file their returns.
  • The report acknowledged a lack of awareness about the process of nominating a principal private residence (PPR) amongst the 1.5 million individuals who own second homes in the UK. The OTS suggest that the government should look at the practical operation of nominating a principal private residence, for example for estate agents and conveyancers to be obliged to distribute HMRC guidance on the PPR nominations process during the acquisition of a new property.
  • For entrepreneurs who are compensated via a deferred payment structure on selling their business, they are proposing that CGT could become payable in the future when the actual cash is received, whilst preserving eligibility to existing tax reliefs at the time of the transaction.

Standalone proposals

  • A practical application of the share pooling rules, for individuals who own the same share or unit in more than one portfolio, to be treated as owning them in separate pools. This potentially avoids the need for complex calculations for those who have more than one investment management relationship.
  • To adjust PPR on the sale of a house, extending it to cover developments in a taxpayer's garden that the taxpayer subsequently occupies.
  • Currently transfers between married couples or civil partners occurs on a 'no gains no loss' basis in the tax year of separation. However, in the proceeding tax year, asset transfers take place at market value and are subject to normal CGT rules. The OTS call for evidence indicated that the average timeline for securing a divorce in England and Wales was 53 weeks. The proposal advises the government to extend the 'no gains no loss' window to the end of the tax year (at least two years after the separation) or, to any reasonable time set for the transfer of assets in accordance with a court-approved financial agreement (or by the equivalent processes in Scotland) to benefit separating couples.

Recommendations impacting significant groups of people

  • Amongst the broader proposals was a recommendation to extend the current 30-day deadline for reporting and paying CGT on UK property disposals, which the OTS described as 'challenging at best', to a 60-day timeframe.
  • Concerns on the policy design of enterprise investment schemes (EIS) were identified, including the short deadlines for issuing shares, interaction with Business Asset Disposal Relief (BADR), and the link between eligibility for CGT and income tax. The OTS proposes the government to assess the rules on EIS to ensure procedural or administrative issues do not adversely affect the effective operation of the relief.
  • On the issue of foreign assets; the OTS stated that when assets are bought or sold, their costs/ profits are converted into sterling when they are incurred or received in order to calculate the gain. Therefore, their absolute gains or losses in the foreign currency are ignored for CGT purposes. The OTS proposes the government to consider whether gains or losses on foreign assets should be calculated in the foreign currency before converting to sterling, to avoid tax rises due to foreign currencies appreciating against the sterling.

In conclusion, whilst the first OTS report provided us with an insight into the potential changes to CGT rates in the future, the overriding message in the recent OTS report is the need for practical improvements to how the tax is applied, rather than a complete overhaul of the existing CGT regime.  

[1] https://www.gov.uk/government/publications/ots-capital-gains-tax-review-simplifying-practical-technical-and-administrative-issues

[2] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/935073/Capital_Gains_Tax_stage_1_report_-_Nov_2020_-_web_copy.pdf

 

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