Further Capital Gains Tax changes recommended by the OTS
Last November the Office of Tax Simplification (OTS) published the first of two reviews of the Capital Gains Tax (CGT) system, in response to a request from the Chancellor last summer.
That first review included recommendations to increase the rate of CGT to align it more closely with Income Tax rates, remove the CGT tax free uplift on assets on death, and abolish some key reliefs including Business Asset Disposal Relief (formerly Entrepreneurs Relief).
Whilst the Chancellor chose not to make any changes to CGT in his recent Spring Budget (with the country still very much in the depths of the Covid pandemic and economic uncertainty), many anticipate that CGT rates will increase in a forthcoming Budget as part of the Government’s strategy to recover its finances following the unprecedented level of Covid financial support.
The OTS recently published its second review, this time focusing on simplifying the practical, technical and administrative issues of the CGT regime. Key recommendations from the review included:
- Extend the deadline for reporting and paying CGT on UK residential property from 30 to 60 days
The OTS comments that ‘even with adequate awareness and preparation it considers that 30 days is a challenging deadline’. It also suggests that estate agents or conveyancers could be asked to distribute HMRC provided information to clients about their reporting requirements to raise awareness.
The general consensus is that extending this tight deadline would clearly be very welcome – recent reports confirm that public awareness of the 30 day time limit is worrying low, with HMRC raising over £1.3m of penalties in the last six months of 2020 from late filers.
- Reduce the complexities regarding Private Residence relief
The Principal Private Residence Relief (PPR) rules apply to exempt gains made on a person’s main home, and they can be complex where a property is not wholly occupied as a home, or where there is more than one residence and a formal nomination can determine which residence should benefit from the relief.
Confusion and lack of awareness of some of the more complex areas of PPR, including nominations for second homes and splitting of land in garden developments, can lead to individuals assuming the relief applies where it does not, or alternatively not accessing the relief when it may be due. So creating clearer rules would be a step in the right direction.
- Extend the time window for separating couples to transfer assets CGT-free
Current CGT rules allow separating couples to transfer assets (typically property and shares) between them without triggering CGT – provided this is done by the end of the tax year following permanent separation. Depending on when separation occurs this can be a relatively short time window, with any transfers after the tax year following separation being deemed to take place at market value and subject to CGT.
The OTS review proposes to extend the spousal exemption by a further two years – to the later of the end of the tax year at least two years after separation, and any reasonable time set for the transfer of assets in accordance with a financial agreement approved by a court.
Given that the average divorce process can take a year or more, many couples do not move onto asset transfers until the current window risks ending, so this extension would allow couples sufficient time to transfer assets and get their financial affairs in order.
- Foreign assets to be calculated in local currency
HMRC statistics suggest that approximately one in ten people in the UK own foreign assets. Current CGT rules require any UK resident selling overseas assets to convert both the purchase cost and sale proceeds into sterling, which means that any gain/loss on the overseas asset will also include an inherent element of foreign currency fluctuations during the intervening period between purchase and sale.
The OTS suggests that calculating the gain/loss on the sale of foreign assets should be completed in the foreign currency and then converted to sterling at the exchange rate at the date of disposal only (and ignore historic exchange rates on purchase), stating this would be simpler and more intuitive for those operating foreign bank accounts and regularly buying and selling assets in foreign currencies.
- Integrate CGT into a single customer account
There are currently three ways of reporting a capital gain – on your Self Assessment tax return, UK residential property CGT return, and the ‘real time’ CGT service. Integrating CGT into one single customer account would simplify the reporting process and be very much in line with HMRC’s goals.
Whilst the OTS review recommendations make sense and to many seem reasonable changes to make, it remains to be seen which of these the Chancellor may decide to adopt and when.
Following the first OTS review last year and the Chancellor’s Spring Budget, our advice was to make the most of the current low CGT rates before the expected increase. Quite whether CGT rates (currently 20% for a higher rate taxpayer or 28% for residential property sales) will be aligned with Income Tax rates (40%/45% for higher rate taxpayers) remains to be seen. But clearly changes will be needed as the Government needs to recoup its financial deficit.
We continue to monitor the ongoing debate following the two OTS reviews, our advice remains for individuals to consider taking advantage of the current low CGT rates while they can. As always, taking informed professional advice to plan before making such decisions is crucial.
If you have any questions on any of the issues raised above please contact Richard Whitelock: firstname.lastname@example.org