After recent press speculation about capital gains tax (CGT) reform, we learn today about the changes that the Office of Tax Simplification (OTS) is advising the Treasury to consider.
The OTS review into CGT is wide ranging and has been split into two reports. The first (published 11 November 2020) covers policy design and principles underpinning CGT. A second report, on more detailed technical aspects, is due to follow in early 2021.
Today's report makes 11 recommendations, some of which are conditional on policy decisions in other areas, and some of which flow into further, more detailed points.
We distil four key messages, setting out the OTS recommendations in the context of the wider debate around CGT reform.
1. The Treasury is under pressure to raise the rate of CGT
The current 20% top rate is a historic low and does not look sustainable in a post-Covid environment where the government will be looking to raise additional tax revenue.
The OTS does not propose any particular rate - that is a political decision - but recommends that the government "consider more closely aligning CGT rates with income tax rates". Full alignment would mean a top CGT rate of 45%.
2. Owner-managed companies, and employee shareholders, are in the spotlight
The OTS recommends that the government consider taxing accrued profits of owner-managed companies, and other rewards of labour (e.g. shares issued to employees), and at income tax rates. This would be a major change for any private companies that generate - but choose not to distribute - significant profits each year.
3. Inheritances may be taxed less favourably in the future
Where an individual inherits shares in a private business, the current rules provide a potential exemption from inheritance tax (business property relief) and also allow an uplift to current market value for CGT purposes. The OTS questions why both of these reliefs are needed, and recommends that the government consider abolishing the CGT uplift.
4. Entrepreneurs' relief continues to attract criticism
Whilst entrepreneurs' relief - recently renamed business asset disposal relief - has become less significant, with a new £1m lifetime limit (down from £10m), it remains poorly targeted, according to the OTS. Investors' relief (similar to entrepreneurs' relief, but for external rather than employee investors) is similarly criticised and should, says the OTS, be abolished.
Taken together, these proposals could significantly reshape the UK tax landscape, changing the balance between the taxation of income and capital.
But changing the CGT rules - and raising tax rates - is a political hot potato. There was considerable public interest in this consultation, with more than 1,000 responses to the OTS's call for evidence. Businesses will be watching closely to see which measures the government chooses to take forward.
The chancellor commissioned the review in July and is desperate to raise money to fill the fiscal hole left by the Covid-19 crisis