An independent review of Capital Gains tax

25 November 2020

The Office of Tax Simplification (OTS) has issued its first report on the policy design and fundamental principles underpinning Capital Gains Tax (CGT), and has made some radical proposals.

At the moment, CGT’s usually payable by business owners, second property owners and investors. It’s charged on gains at 10% for basic rate taxpayers and 20% for higher and additional rate taxpayers, or 18% and 28%, respectively, where the gains relate to residential property.

In contrast, Income Tax is charged at a basic rate of 20%, rising to 40% and 45% for higher and additional taxpayers (lower rates apply to dividends). However, CGT accounts for only 5% of revenue achieved from income tax. It seems reasonable then to say this is an easy place to increase revenues for the Exchequer.

The report also draws out where the features of CGT can distort behaviour, including its boundary with Income Tax and interconnections with Inheritance Tax (IHT) and makes a number of recommendations for the Government to consider.

These include some significant potential changes to the CGT rules, such as:

  • Abolishing or reforming some valuable reliefs including replacing Business Asset Disposal Relief (formerly Entrepreneurs’ Relief).
  • Increasing the CGT rates to align more closely with rates of income tax.
  • Decreasing the CGT annual exemption (currently £12,300) to £4,000 or less and moving to a ‘real-time’ CGT system.
  • Taxing share-based rewards to income tax rather than CGT.
  • Removing the capital gains base cost uplift on death.

The OTS report was commissioned by the Chancellor, but it remains unclear at this stage as to what appetite the Government may have for fundamental changes to the system, particularly while the Government’s battling with the COVID-19 pandemic, its effects, and impact on the economy.

This report was the first of two OTS reviews of the CGT system and was focused on policy design and principles underpinning the tax. The second, will look at key technical and administrative issues and is due to be published next year.

Given the changes to entrepreneurs’ relief which came earlier this year as part of the budget, the Government’s clearly keeping this area of tax under close review. We urge you to plan ahead in anticipation of possible changes and rate increases, and discuss any questions you might have with us – so please contact Mo Alimahomed on 0116 490 4274.