Yesterday, the Chancellor, Rishi Sunak, wrote an open letter to the Office for Tax Simplification (OTS) asking them to perform a review into the Capital Gains Tax (CGT) regime, with a brief that included identifying “opportunities to simplify the taxation of chargeable gains, to ensure the system is fit for purpose”. While some might argue that a Chancellor questioning whether the tax system is ‘fit for purpose’ is a foolhardy endeavour, this may be the first hint at answering the question that is on everyone’s lips, particularly following his Summer Economic Statement last week which included further billions of assistance- how exactly are we all going to end up paying for all this help?
CGT is not an untampered-with tax. Even in the Budget earlier this year, Mr Sunak fiddled with Entrepreneurs’ Relief (and actually changed its name to Business Asset Disposal relief, or BAD relief for those who like an in-joke) by reducing the lifetime limit from £10m down to £1m, which is the fifth change to that limit since the introduction of the relief as a replacement for taper relief back in 2008. The rate of CGT has also changed a number of times in the past 12 years, and we currently have four main rates of CGT, 10%, 20%, 18% and 28%, depending on your individual income tax rate, the property of which you are disposing and any reliefs you may have available.
Interestingly, in the Chancellor’s letter he also asked the OTS to look at the “interactions of how gains are taxed compared to other types of income.” While the description of gains as another type of income is perhaps Freudian, it does suggest that the issue of horizontal equity- that is, different types of income being taxed at different rates and how this distorts behaviour- is something the Chancellor is looking to address. After all, if gains were taxed at the same rate as income, or indeed gains were subject to income tax itself, this would preclude a great number of tax planning shenanigans aimed at converting income into gains to take advantage of lower tax rates.
But this may not come as welcome news to entrepreneurs- capital gains are the remit of the wealthy, and they may see this as a further attack on their funds. The OTS itself notes that those who pay CGT are twice as likely to pay higher rate income tax as taxpayers generally.
The OTS have now published a detailed description of their remit, and opened a public consultation, as well as an online ‘CGT quiz’ which can be accessed here. The consultation is in two parts, with the first seeking high-level comments on the principles of CGT by 10 August 2020, while the main second section of the document is looking for more detailed comments on the technical detail and practical operation of CGT by 12 October 2020.
The main areas into which they are investigating have been detailed as follows:
- the overall scope of the tax and the various rates which can apply
- the reliefs, exemptions and allowances which can apply, and the treatment of losses
- the annual exempt amount and its interactions with other reliefs
- the position of individuals, partnerships and estates in administration but not trusts or residence and domicile issues
- the position of unincorporated businesses, including the setting up, selling or winding up of such businesses
- the position of stand‐alone owner managed trading or investment companies but not the positions of large or group company structures
- any distortions to taxpayers’ personal or business investment decisions
- interactions with other parts of the tax system such as Income Tax, Capital Allowances, Stamp Duty Land Tax (SDLT) and Inheritance Tax
The emphasis on reliefs and on unincorporated businesses and owner-managed companies, and the fact that the consultation is timed to give responses just at the time the Chancellor is likely to be drawing up his autumn Budget proposals, may therefore give business owners cause for concern. Given the scale of the COVID-19 payout, it is unlikely that any changes mooted for CGT are going to result in a tax saving, so anyone thinking of restructuring their affairs, or looking to make a sale, might be advised to think about acting sooner rather than later, or pay the price for delay.
