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IHT and CGT simplification – meaningful reform off the table following OTS review

The duo of reviews conducted by the Office of Tax Simplification (OTS) into inheritance tax (IHT) and capital gains tax (CGT) have finally reached their conclusion. At the Tax Administration and Maintenance Day (30 November 2021), the government issued a letter to the OTS responding to the reports it had commissioned stating that it had decided not to proceed with any major changes to IHT and CGT. The delay in the response from the government (some two and half years after the second IHT report was published in July 2019, and over 18 months after the second set of CGT recommendations) had heightened expectations that the government was considering a major reform.

In both instances, the government recognised that the reports issued by the OTS raised a number of issues that strayed into policy (and ultimately political) decisions. In fairness, the OTS had been put in a difficult position. On the CGT review they were specifically requested to look at “areas where the present rules can distort behaviour or do not meet their policy intent”. In the CGT report this meant the OTS’s findings strayed into a discussion about the rate of CGT and whether there should be alignment with the rate of income tax – a discussion arguably outside of the OTS’s traditional remit. Similarly the IHT report drifted into policy when it considered business property relief and its interaction with the CGT uplift on death. Although the OTS stopped short of any suggestion to abolish the relief, it was acknowledged that some aspects of the BPR regime were distortive, overly complex and, at times, inconsistent with other parts of the UK tax code. This left many privately owned businesses nervous that the government may take the opportunity to overhaul both taxes.

For now, the OTS can take solace from the five recommendations the government has accepted that focus on practical administrative easements rather than the design of the taxes. 

  1. Improvements to reporting and payment of CGT through a new single customer account to bring together the different taxes and data sources associated with a particular taxpayer.
  2. Extending the reporting and payment deadline for UK property related CGT charges from 30 to 60 days (which was announced as part of the autumn Budget).
  3. Extending the “no gain no loss” window on separation to the later of (i) the end of the tax year at least two years after the separation event; or (ii) any reasonable time set for the transfer of assets in accordance with a financial agreement approved by a court or equivalent process in Scotland. This will make life much simpler when transferring property after a divorce. The government will consult on the detail of this proposed change next year.
  4. Expanding the rollover relief rules which apply where land and buildings are acquired under compulsory purchase orders. The government will consult on the detail in due course.
  5. Improvements to HMRC guidance across a number of specific areas including loans to business that become irrecoverable; business asset disposal relief application to those looking to retire over a period of time; and enterprise investment schemes (EIS). The government has also committed to further consideration of the EIS rules with a review potentially coming down the track.

These taxes will no doubt remain under review however many will be relieved that meaningful reform is off the table for this parliament.

UK shelves proposals to raise capital gains tax rates and cut allowance. Treasury also rejects ideas from Office of Tax Simplification to reform inheritance tax.

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tax, tax policy, petf

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