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November 12, 2020

Align Capital Gains Tax & Income Tax, Says OTS

In July 2020, Chancellor Rishi Sunak asked the Office of Tax Simplification (OTS) for a review of the taxation of chargeable gains. This request, compounded with the financial support measures introduced in light of the coronavirus pandemic and the restriction of Entrepreneurs' Relief earlier this year led many tax advisors to speculate whether this would pave the way for increases in Capital Gains Tax (CGT) in the near future.

The OTS has published the first of two reports setting out the results of the review, and has suggested (amongst other recommendations) that there should be a greater alignment of income tax and CGT. In other words, the current CGT rates should be effectively doubled.

Under the current regime, CGT rates range between 10% to 28% depending on the nature of the asset sold, the seller’s income, and the availability of reliefs. This is considered generous, particularly when compared to income tax rates of between 20% - 45%.

As noted in the OTS's report, the difference in CGT and income tax rates provide an incentive for taxpayers to structure transactions so they benefit from capital rather than income treatment. Therefore, their view is that a greater alignment of rates would reduce the need for complex rules to police the boundary between income and gains, as the way the income is classified would not affect the tax position.

Other potential areas highlighted by the report for consideration by the Chancellor include:

  • Reducing the number of CGT rates from four (10%, 18%, 20%, and 28%) to two, and reducing the interdependence with income tax.
  • Taxing some or all of the retained earnings remaining in a company on liquidation or sale at dividend rates.
  • The introduction of a form of relief for inflationary gains.
  • Taxing more of the share-based rewards arising from employment at income tax rates.
  • A reduction of the Annual Exempt Amount so it operates as an administrative de minimis threshold. If the Annual Exempt Amount is reduced, further consideration should be given to introducing a broader exemption for personal effects, formalising the administrative arrangement for the real time capital gains service, and requiring investment managers to report gains information to HMRC.
  • Removing the capital gains uplift on death where an Inheritance Tax relief applies (e.g. Business Property Relief).
  • Removing the capital gains uplift on death more widely and rebasing all assets to, say, the year 2000 and extending Gift Holdover Relief to a broader range of assets.
  • Replacing Business Asset Disposal Relief (formerly Entrepreneurs' Relief) with a relief more focused on retirement.
  • Abolishing Investors' Relief.

It is important to note that at this stage the OTS's comments are merely suggestions to the Government and therefore may not be introduced as law. Normally taxpayers are given some warning before new tax changes comes into force, therefore it may be premature for you to seek to crystallise your gains before any policy announcements.

That said, this is a good opportunity to review your affairs with all taxes in mind and perhaps consider bringing forward plans where a decision to sell has already been made.

PD Tax are following these developments with great interest, and will publish updates as further details are revealed.

If you are unsure as to what these changes might mean to you, or if you require advice on a sale, please contact a member of our team.

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Stop all the Clocks – OTS Suggest Simplifying Inheritance Tax

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