Office of Tax Simplification report on Capital Gains Tax simplification

13 Nov 2020

The Office of Tax Simplification (“OTS”) has now published its first report with recommendations on the simplification of the Capital Gains Tax (“CGT” regime). The report was requested by the Chancellor Rishi Sunak in July of this year and will be the first of two – this report covers policy design and the principles underlying CGT, while the second to be published in the New Year addressing more technical and administrative issues.


It is important to be clear from the outset that the report does not represent Government policy and there is no guarantee that any or all of the measures suggested will be introduced. Equally it is reasonable to expect that at least some of the measures will be introduced in the near term and, taken together with the OTS report into the reform of Inheritance Tax published in 2019 could represent the first steps into a radical reform of the entire capital taxes system in the UK. In the context of the current support being provided to businesses and individuals during the Coronavirus pandemic it perhaps comes as little surprise that many of the “simplifications” in the report double as revenue raising measures.

The key suggestions in the report are as follows:

Rates and boundaries

The report finds that the current system of tiered CGT rates which are lower than income tax rates creates significant distortions in the tax system and causes taxpayers to change their behaviours to achieve certain tax outcomes. There are a number of methods which the OTS believes could be used to address this, depending on what Government sees as a priority:

  • Move to more closely align income tax and CGT rates, thereby removing perceived pressure on the boundary between the two taxes. This may be compensated to some extent by reintroducing some form of indexation allowance to take gains caused by inflation out of the system, and potentially making the use of capital losses more flexible than they are at present.

  • To discourage company shareholders from retaining cash in their businesses in order to access CGT rates on sale or liquidation, introduce a system whereby earnings retained in a company are taxed at dividend rates on a liquidation or sale.

  • Tax gains on employee shares as income rather than capital – so in effect to remove the tax advantages associated with statutory employee share schemes such as the Enterprise Management Incentive (noting that many “unapproved” employee share schemes are already taxed under income tax rules)

  • Taxing unextracted retained earnings in smaller companies at income tax rates to remove part of the advantage of incorporation.

Annual exempt amount

It seems that the view is that the annual exempt amount for CGT (currently £12,300) is in place largely as an administrative simplification. With that in mind the OTS recommends:

  • The level is currently too high to be justified as such a simplification and it should therefore be reduced.

  • In conjunction with the reduction, other simplification measures should be introduced such as extending the chattels exemption and limit taxable gains on personal effects to only certain specific assets and “formalising” the current voluntary real time reporting of capital gains (so presumably making it mandatory).

Capital transfers

As was trailed at the time of the inheritance tax report in 2019, the OTS considers there are significant distortions in the interaction between the IHT and CGT systems, particularly on death. To address these distortions the OTS recommends:

  • Removing the CGT step up in base cost to market value on death for assets which are exempt from or relieved from IHT (the obvious categories here being those assets which attract Business or Agricultural Property Relief). Assets would instead transfer at their historic base cost.

  • Going further, consideration be given to removing the market value step up for ALL assets on death so all assets are acquired by beneficiaries at historic cost.

  • In conjunction with these changes, a “rebasing” of all assets to their market value for CGT purposes as at 2000 is suggested along with an extension of gift holdover relief to extend to other assets

Business reliefs

Perhaps predictably the much reduced Business Asset Disposal Relief (formerly known as Entrepreneur’s Relief) is considered to be a poorly targeted relief which distorts behaviour). The OTS therefore recommends:

  • Reshaping the relief by perhaps increasing the minimum holding to 25%, increasing the minimum holding period to ten years and introducing a lower age limit (perhaps linked to the limits in the pensions freedom regime) to focus the relief more on those exiting their business on retirement.

  • Investor’s Relief (essentially a form of Entrepreneur’s Relief for third party investors) should be abolished (while recognising this relief is only very rarely utilised).

WR Partners comment

Again it is important to be very clear that at the moment these are just recommendations and the Government is not in any way obliged to act on them. It is disappointing to read some of the same old cliché’s about distortions in the tax system being rolled out again and it is to be hoped that any reform is carried out in a measured and structured way and not as a knee-jerk reaction to a perceived need to raise revenue to fill the hole in the national budget created by Coronavirus. Certainly now does not seem to be the time to reduce the incentive for individuals to invest in small and medium sized businesses which form the backbone of the economy.

At the same time there has to be an expectation that at least some of these measures will be introduced sooner rather than later and perhaps as early as the Budget in the spring of next year. This leaves little time for taxpayers to form a coherent plan for how they might deal with any such changes and it is to be hoped again that there will be at least some notice of intended changes before any Spring Budget to allow taxpayers to adjust their affairs.

Equally, as with the previous changes to the former Entrepreneur’s Relief, it has to be expected that any changes will be backed up by “anti-forestalling” measures which will seek to catch those transactions entered into artificially in order to secure the benefits of current rates and reliefs. Any action that is to be taken needs to be very carefully considered to avoid the risk of making a bad situation worse – we would strongly recommend discussing any concerns you may have with your usual WR Partners contact before taking any action.

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