In July 2020 the Chancellor of the Exchequer asked the Office of Tax Simplification (“OTS”) to carry out a wide-ranging review of Capital Gains Tax (CGT). The OTS has made a number of significant recommendations. Many of the recommendations are not new and many of them seem to involve reintroducing concepts in CGT that have been long since been abolished. This blog looks at what these recommendations are.
Reduction in the CGT Annual Exemption
Currently the annual exemption is £12,500. It is proposed to reduce this to just £5,000 per annum. This is likely to cause many more individuals to pay CGT on an annual basis. The OTS take the view that many individuals structure their affairs to make gains rather than income on investments to take advantage of the annual exemption!
Aligning Income tax rates and CGT rates of tax
The current rates of CGT, 10% and 20% for ordinary gains and 18% and 28% for gains on residential dwellings are thought of as complex and as they are below income tax rates distort taxpayer behaviour.
Abolition of automatic CGT rebasing on Death
When an individual dies their estate has a potential liability to Inheritance Tax (“IHT”) subject to whatever reliefs and exemptions for IHT their estate may have be entitled. Following this, the assets in an estate are re-valued to market value for CGT purposes washing out past gains. The rationale behind this that the same asset should not bear both of the two separate taxes. The OTS propose that if an IHT exemption applies on death so that no IHT is paid on the asset there should be no CGT rebasing so when the asset is sold by the estate or a beneficiary CGT would arise.
What is next?
The Government will consider these recommendations and we wait to see what action is taken.