Helen Jones is a partner in tax services for private clients of accountants and business consultants BDO
Helen Jones is a partner in tax services for private clients of accountants and business consultants BDO.
Chancellor Rishi Sunak wrote to the Office of Tax Simplification last week to review capital gains tax.
This has left many wondering whether sweeping CBT reform is likely, possibly as early as the fall budget.
Subsequently, on Monday July 20, the House of Commons Public Accounts Committee released the Tax Reduction Management report, which stated that the top 10 most expensive UK tax cuts cost the government £ 117 billion a year in lost tax revenue, while reportedly only one of the four reliefs has intended effect on economic behavior according to government evaluation.
This is related to the coordinated calls we heard for Covid-19 for much needed tax simplification. Now, a review of the tax system could lie ahead.
Given the Chancellor’s obvious need to increase tax revenues in the future, it is important that, unlike many of the previous assessments of the OTS, it has been specifically tasked to look at the various grants and exemptions that CBT- complicate calculations and disrupt behavior, as well as how profits are taxed compared to other types of income.
Historically, the UK taxed capital gains at income tax rates. While it is theoretically easier to treat earnings as income, for a year it brings enormous complexity to people’s overall tax position. Previously, we had one fixed percentage of CBT (then 30 percent).
Obviously, one rate is much easier to apply than the four rates (see fact box below) that can now apply. In this piece, I will outline five key areas that could influence CBT reform.
Changes in exemptions / exceptions
Current CBT rates
Standard rate 10%
Higher rate 20%
Standard rate for homes 18%
Residential real estate / interest transferred higher 28%
There is an abundance of exemptions and exceptions that may apply.
Many were introduced to encourage specific behaviors, such as investing in high-risk start-ups or enabling funds to be reinvested in UK companies.
In view of the current economic position, some of these can be simplified to make it easier to qualify.
Alternatively, since investors are getting almost no return on their cash savings, the chancellor may decide that it is no longer necessary to provide tax incentives to invest in companies, since their higher investment returns are enough to attract investors anyway.
Investments in Isas are currently CGT-free. This is a huge and unlimited tax break for many.
Again, these vehicles are used to encourage people to save for their long-term safety, so we would expect them to remain untouched.
Wealth robbery: Chancellor Rishi Sunak wrote to the Office of Tax Simplification to have Capital Gains Tax reviewed
Simplify the exemption from main residence
For most people who should consider CBT, selling a home is the cause.
The rules of principal residence exemption (AKA Principle of Private Residence Exemption) can be very complex and since disposals must now be reported and taxed within 30 days of completion, simplification is needed.
Some countries (e.g. the US) have a flat-rate exemption for the sale of a home.
Perhaps the chancellor in the UK will create the same thing: an exemption of £ 500,000 per person would mean the couple would only pay CGT for the sale of the house where the profit was over £ 1 million.
This would mean that most people don’t have to calculate their profit.
In the event of death, all assets are treated as disposed of, but there is no added value. Instead, the current market value is used to determine the amount of inheritance tax payable. The introduction of CBT at death could generate a tremendous amount of income for the chancellor, but it should go hand in hand with the reform of the IHT.
The principal residence exemption could be simplified – for example, with a flat-rate exemption for the sale of a home
Each of us currently has an annual exemption of £ 12,300 for capital gains. This usually means that there is no need to report small profits to HMRC.
In the current economic climate, it may not be considered fair that people who have capital to invest can take advantage of this tax exemption (in addition to the usual income tax), while those without money to invest cannot. The annual exemption can therefore be cut or removed.
Overall, it is clear that changes in CBT will be warmly received in some quarters, and less in others. Many companies will hope that the CGT goal posts don’t move again until the economy recovers.
Instead, it would probably be well received if Mr. Sunak would help support businesses by investing in HMRC to expand tax deductions to help businesses and their owners respond more quickly and with greater certainty.
For individuals, the simplification of CBT in the main residence would benefit most taxpayers.
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