Entrepreneur’s Relief, Raising CGT Rates And Reducing The Annual Exemption

Back in July, when we were still preparing for an autumn Budget and in blissful ignorance of #lockdown2, the Chancellor wrote to the Office for Tax Simplification (OTS) asking them to look into Capital Gains Tax (CGT) with a view to making recommendations for its reform. Now, the OTS has published the first part of its report, and despite the date being a little late, there are a few fireworks still to be found.

Main recommendations

This report is specifically described as being prepared in relation to the policy design and underlying principles of CGT, and is aimed at exploring opportunities to reform the tax as well as identifying areas where tax has a distorting effect on behaviour. The report comes after 22 consultation meetings, 96formal written responses from interested bodies and over 1,000 responses to a public online survey.

The recommendations are, if not entirely unexpected, not great news for anyone hoping that the tax might be left well alone in order to support and encourage business following the catastrophic effect of COVID 19 on many industries.

The key recommendations are that the Government should:

• Consider more closely aligning income tax and CGT rates, mindful that this would then require a new relief for inflation and/or a rebasing exercise
• Consider reducing the number of CGT rates and making them not dependent on income
• Reduce the annual exempt amount
• Remove the CGT uplift in value on death where an IHT relief (eg Business Relief) applies, although again this may warrant a rebasing (the year suggested is 2000 which is still 20 years ago!)
• Scrap Business Asset Disposal relief (formerly Entrepreneurs’ Relief) and replace with a relief focussed on retirement

New and groundbreaking recommendations?

So are the OTS’s recommendations news? Well, they are new in the sense that they have only just been published, but the ideas behind them are not so novel.

Increasing the CGT rates from 10/20% up to 20%/40% in line with income tax was the status quo throughout the nineties and early noughties.  Introducing a relief for inflation would bring us back to the days of indexation relief, which was frozen, and then scrapped for individuals in 2008 for being too complicated. Nor is rebasing a new idea, although the last time it happened was under Nigel Lawson when assets were rebased back to March 1982. And flat rates of tax that aren’t dependent on income? In the last 40 years we’ve tried that twice, at 30% and 18%.

The CGT uplift on death wasn’t always with us, and at certain times in the dim and distant past taxpayers could have paid both CGT and Estate Duty on assets passing on death. And while scrapping Entrepreneurs’ Relief (ER/BADR) entirely is a surprising announcement, the idea of replacing it with something like a retirement relief is actually very amusing for those of us who have been advising for some years, given that when ER/BADR was first introduced in 2008 it was literally copying the old Retirement Relief legislation that had previously been abolished in 1998. Swings and roundabouts indeed!

When will these changes come into effect?

Simply put, they may never come to pass. These are only recommendations, and are not binding upon the Chancellor in any way. That said, the fact that he asked for the recommendations does give them greater weight than if the OTS had prepared a speculative report.

All we can do is watch the Spring Budget next year to find out how and when any changes are made.