Capital gains tax – time for reform?
Capital gains tax – are we likely to see major changes?
The Chancellor has recently asked the Office of Tax Simplification (OTS ) to carry out a review of CGT to identify simplification opportunities. Remember that CGT is paid by individuals and trusts; companies pay corporation tax on chargeable gains.
The call for evidence is in two stages:
- the first stage seeks high-level comments on the principles of CGT, by 10 August 2020; and
- the second and main stage invites more detailed comments on the technical detail.
The specific themes identified in the principles section of the call for evidence are:
- Allowances, including the annual exempt amount – its level and the extent to which it distorts decision making.
- Exemptions and reliefs, including how they fit together and the extent to which they incentivise some decisions over others.
- The treatment of losses within CGT, including the extent to which they can be used and whether the loss regime distorts decisions about when to buy or sell assets.
- The interactions of how gains are taxed compared to other types of income, including how the boundary between what is taxed as gains rather than income works. Should there be different regimes for short‐term gains, compared to long‐term gains?
So, what do I think should or will happen?
I have long thought that there needs to be a closer alignment between tax on short-term gains and income tax rates, with some form of relief for longer-term, non-speculative gains. I was never sure why Business Asset Taper Relief (BATR) was abolished and replaced with Entrepreneurs’ Relief (ER) – it seemed to me that ER gave far more scope for abuse than BATR ever did.
It’s clear that any changes must be effective in preventing income receipts being converted into capital if there’s any difference in the rates between income tax and capital gains tax. Similarly, there would need to be some interaction with national insurance, assuming that the NI system and tax system are not fully-integrated (that is another huge subject in itself).
Most importantly, things need to be simple. With lifetime ER now at only £1 million, there’s still huge complexity surrounding eligibility, and the cost of obtaining proper advice on this can be disproportionately expensive.
What would I do?
- Completely re-write the Taxation of Capital Gains Act (for both individuals and corporates).
- Abolish the distinction between business assets and other assets.
- Tax all gains on assets held for less than 3 years as income.
- Taper gains on assets held for between 3 and 10 years by 5% a year and tax the balance (the amount after the taper relief) as income.
- For all gains on assets held for 10 years or more (regardless as to the type of asset) tax at a flat CGT rate of 30%.
- Abolish the annual exemption for individuals.
Cleverer minds than mine would need to work out what this would mean in terms of overall tax take but it would certainly make the taxation of capital gains far easier to manage.
Will something like this happen? Of course not! There will be more tinkering, more confusion, no real progress. And continued fees for tax advisers such as me….