So: what about CGT: has there been a reprieve?
In my previous articles on tax on this website, such as ‘Tax planning: Capital Gains Tax’ and ‘Looking after the family finances in the aftermath of the pandemic’ I have painted a gloomy picture, encouraging clients to take early action to avoid punitive tax charges about to be imposed by a Chancellor keen to pay for the pandemic. Recent events suggest that the axe is not going to fall just yet, at least in relation to Capital Gains Tax (CGT).
To recap: it was felt by many in Parliament that this tax was too complicated, and in particular that the burden of compliance on families was too great. Even though I make my money from helping with compliance, I agree that the tax structure is too complicated and that the burden of completing tax forms and any supporting schedules is just too much for most people.
Responding to this situation, the Office of Tax Simplification (OTS) prepared a review and suggested many improvements to the CGT regime. However, in a recent letter the Treasury have refused to adopt many of those proposals. John Barnett, a senior representative of the tax profession, put it neatly:
Everyone says they support tax simplification but the government’s responses today show how difficult it is to achieve…. Bluntly, the challenge the OTS faces is that, while ministers buy in to the principle of simplification, whenever it comes up against political or revenue obstacles they trump it. If a significant reform costs the Exchequer money the government reject it. If a significant reform doesn’t cost the Exchequer money it normally produces losers who will make a fuss so it gets rejected then as well.
What has actually been decided?
The OTS made 14 specific recommendations. It is worth looking at each, because this may help with future tax planning.
1 Single Customer Account
We are all going to have to get used to this (SCA), for all taxes. The Inland Revenue (HMRC) are very keen that, sooner rather than later, our interaction with them can be online. The OTS recommendation, that the way that we report gains should be simplified, was therefore accepted.
At present, we have one system for most types of gain, under which they are reported on an extra page to the annual tax return and the tax falls due on 31st January following the end of the tax year. There is a different system for gains arising on the sale of residential properties, under which a return must be made within 60 (formerly 30) days of completing a property sale. The system for ‘property gains’ has forced many taxpayers to open their own personal tax account online.
My instinct tells me that, if we are to have only one system, it will be modelled on the ‘property gains’ pattern. So we might end up paying CGT much sooner than at present. That is borne out by what follows.
2 CGT reporting ‘in real time
The OTS proposed that there should be a standalone CGT return that could be completed by agents. That builds on the point made above. That might suit HMRC very well, so they are considering the idea as part of SCA.
3 Give us more tim
The OTS asked for the 30-day reporting deadline for CGT to be extended to 60 days. HM Treasury agreed and is legislating for this.
This makes a lot of sense. Where, for example, a house is sold by executors, there are technical problems, in that the executors cannot really open a SCA because they are a group and the unit of reference for the SCA is the individual. So the system does not really work for an estate. It is different for a trust, which has a ‘lead trustee’, who can open a SCA.
4 Simplify the rules where there are several shareholdings in the same company
The idea from OTS here was that where, for example, a person happened to own shares in a company within separate portfolios those holdings could be treated as one for tax purposes. HM Treasury will consider the idea.
5 What about building in your back garden?
OTS wanted to adjust the CGT relief in the situation where a taxpayer builds a new house in her garden and moves to live there. H M Treasury rejected the idea, being happy with the way the rules work at present.
6 Simplify the rules for people who own two residences at the same time
The present rules involve the ability for a taxpayer to ‘nominate’ one of two or more residences as her ‘main’ one, so that a gain arising on its disposal is relieved. This can completely change the liability to CGT on eventual sale. The rules are complicated and involve a significant trap, as where a person ‘acquires’ a new residence by moving into rented accommodation. HM Treasury recognise that there is a problem and will think about it. Again, they are keen for this to be part of the greater use of SCA.
7 Give divorcing couples more time
At present there is a ‘no gain, no loss’ rule on transfers between spouses or former spouses, but often the time limit in the rule has expired before the parties have agreed financial provision between themselves. OTS asked for the transfer ‘window’ to be extended until: at least two years after the separation; or (if later) the time set by the court for transfer of assets between the parties. HM Treasury have agreed this, in principle.
This is really good news. Divorce is stressful enough, without extra tax liabilities and deadlines forcing early – and perhaps unfair – settlement of disputes.
This is really good news. Divorce is stressful enough, without extra tax liabilities and deadlines forcing early – and perhaps unfair – settlement of disputes.
8 Give time to pay CGT
The issue here is that in, for example, the sale of a business where part of the price is deferred, the seller may get a bill for CGT before all the sale proceeds have come in. HM Treasury have rejected the idea.
9 Make the tax status of corporate bonds clearer
As a rule, most fixed income securities are outside the scope of CGT. OTS wanted this to be clearer in the documentation. HM Treasury will look at the idea: they are looking at the taxation of corporate bonds generally.
10 Make EIS easier to use
One problem with the Enterprise Investment Scheme is that the paperwork can be so burdensome that an investment scheme never gets off the ground. HM Treasury recognise that there is a problem and will review how EIS works.
11 Convert foreign gains or losses in local currency
At present, each part of the transaction must be converted to sterling and the gain or loss calculated by comparing the converted amounts. HM Treasury rejected the idea of measuring the gin or loss in the local currency and then seeing if a gain or loss had resulted. Things will stay as they are.
12 Ease the rules on Rollover Relief
The OTS proposal is that the relief should be extended where land or buildings are taken by a Compulsory Purchase Order (CPO). HM Treasury have agreed: they will widen the relief so that where a CPO brings a landowner into gain, they can ‘lay that gain off’ by improving other land that they own.
This makes good sense. While a CPO may bring in a gain, which may seem to be ‘a nice problem to have’, the landowner may not have wanted to lose the land and may quite simply not be able to find any land to replace it. Improving what he already has may be the only way to put the money to good use within the business.
13 Do not tax a person for just extending his own lease
This is a technical issue. HM Treasury rejected the idea.
14 Improve the official guidance
OTS wanted HMRC to improve guidance in many areas, including the UK Property Tax Return, lodgers, working from home, the debt rules, irrecoverable business loans, the tax on farmers who gradually wind down their operations, EIS,and other detailed areas. The Government agreed and will publish new guidance soon.
That is fair enough but all that guidance should not be necessary. Our tax law is, fundamentally, too complicated. The Government should heed John Barnett’s comments and should be willing, even at some cost, to make things simpler.
That is fair enough, but all that guidance should not be necessary. Our tax law is, fundamentally, too complicated.
So is there no need to worry?
Well, no. In my view, the basic problem for the Government is still there. With regular appeals for help for those industries most affected by the pandemic, and with many businesses earning less, and generating less in tax revenues, money will be tight for the Government as well as for families. Things are not looking good. We may eventually make good the trade losses arising from Brexit but it will take time. Businesses are not investing as much as some would like. There are shortages of workers in some sectors and elsewhere there are people who cannot find the work they want near where they live.
At the moment, the rates of CGT are really quite low. Whilst we do not now expect those rates to increase soon, the gap between CGT and Income Tax rates is very wide, which supports clever tax schemes to turn income into gains. HMRC are constantly shutting down such tax schemes, and rightly so. It would be much simpler to raise CGT rates so as to remove the arbitrage. Apart from that, few people actually make gains that attract CGT. As a result, an increase in CGT rates would affect only a few voters; and this Government has shown itself to be more concerned with staying in power than in always doing what is right for the country.
My general advice (though circumstances alter cases and in each case you do should do the sums, or ask me to) is still to crystallise gains under the present benign regime, in case it does not last long.
Crystallise gains under the present benign regime, in case it does not last long.