Capital Gains Tax: Are major changes on the way?

The Office of Tax Simplification (OTS) has published its report on Capital Gains Tax, which looks at how the difference in the way the levy is calculated compared to Income Tax can distort people’s behaviour.

Corporate Tax Partner, Paul Twydell, has highlighted some of the report’s key points which may impact our clients in the future.

The OTS considers there to be too many rates of CGT and recommends removing some of these rates.

Most noticeably, the body recommends Investor Relief to be scrapped and that Business Asset Disposal Relief (formerly Entrepreneur’s relief) could be overhauled to a more retirement-only relief. If these recommendations are implemented this could see the end of the 10% tax rate.

The OTS recommends that CGT rates are more closely aligned with Income Tax rates.

This is not a new position and has been commented on for many years which, in some cases, could see gains being taxed as high as 45%.

However, the body has identified that if the rates were aligned, further reliefs should be put in place, such as a return of indexation to ensure inflation-only gains are not taxed at this level.

The annual exemption amount, presently £12,300, is considered too great a relief to purely relieve an administrative burden for HMRC, and if retained the OTS recommends that this is reduced.

The high level of relief is considered to affect investment decisions, such that in tax year 2017-18, around 50,000 people reported net gains close to the threshold and so ‘use up’ the allowance.

The OTS recommends that the interaction between IHT and CGT should be looked at more closely.

The body has proposed that where an asset is exempt from IHT, such as qualifying for Agricultural/Business Property Relief, the asset should not also be rebased in the hands of the person inheriting, leading to a CGT charge on the eventual disposal.

If CGT rates are not aligned with income tax rates, the OTS has proposed that certain matters currently treated as subject to capital gains to be charged wholly or in part to Income Tax.

One potentially radical example would be that on the liquidation or sale of a company HMRC could tax some or all of the retained earnings remaining in the business at dividend rates. The body’s justification for such a change is to make the treatment of cash taken out of the business during and at the end of its life more neutral. If implemented, this would represent a significant change.

Another area open to challenge if CGT rates are retained at the current level would be share-based remuneration.

The OTS has identified that this is a complex area and have noted that tax-advantaged share schemes such as the Enterprise Management Incentive (EMI) Scheme have a policy justification for being taxed in a different way, but this could lead to further changes in other share schemes such as growth shares.

So, what happens next?

It is important to remember that the OTS is merely an advisory body which makes recommendations for the government to consider. It does not implement changes as these are a matter for Government and for Parliament. However, the timing of the release of the report is intriguing where there is no Autumn Budget.

We do not expect significant tax legislation to be introduced until Spring 2021 at the earliest and it could be perceived that by the government publishing a report as wide-ranging as these 3-4 months before any legislation on the subject is effectively advance warning that things are going to change.

The impact on share-based remuneration cannot be determined at this time but it may be the case that the government are already planning changes in this area. We were expecting that a consultation over the future of employee share schemes – such as the Enterprise Management Incentive (EMI) Scheme – would take place over the summer, but this did not happen. If the OTS are suggesting a major overhaul as to how share schemes are taxed on exit, this could have major implications as to the future of the EMI Scheme.

How can we help?

If you would like to discuss the issues raised in the report in any further detail or have any concerns as to the future of Capital Gains Tax, please contact Paul Twydell or Anthony Rose.

Paul Twydell is a corporate tax partner who specialises in advising on the Enterprise Investment Scheme (EIS), employee share scheme matters such as the Enterprise Management Incentive (EMI) Scheme and also Research and Development (R&D) tax relief.

Anthony Rose is a tax partner who specialises in advising on private client matters specifically relating to residence, domicile, estate planning and offshore and international tax planning.