Capital Gains Tax reforms proposed…

Changes were made to the Capital Gains Tax regime recently, that were described as ‘seismic’. The Office for Tax Simplification (OTS) has now called for an overhaul of the Capital Gains Tax (CGT) rules, for a range of reasons.

A recent report by the OTS notes their concern that many people who pay CGT do so only very rarely. This means that the subject is one around which they have limited knowledge and experience, leaving them likely to make mistakes. The OTS claims that there is a low level of awareness of the tax within the general population, and that the administrative systems are less supportive than they could be.

Bill Dodwell, OTS tax director said: ‘Many people have limited awareness or understanding of capital gains tax. As the tax tends to affect taxpayers on a one-off basis (over 70% of those paying it in the 11 tax years to 2017-18 did so only once in that period), they do not so readily pick up the knowledge and experience that comes from dealing with something regularly.

‘This means it is particularly important that the rules, and HMRC’s guidance and processes, are intuitive and fit with the practicalities of life, so far as possible.’

Property Returns and the 30-day deadline

One of the areas that is most concerning to the OTS, (and to us!) is UK property tax returns. These are submitted by around 150,000 individuals, who make a disposal of UK residential property each year. Of those, 85,000 have a taxable gain and need to file a UK property tax return within just 30 days.

OTS said that ‘even with adequate awareness and preparation the OTS considers that 30 days is a challenging deadline’.

The OTS therefore recommends that the Government should extend the reporting and payment deadline from 30 to 60 days. They also recommend that estate agents and / or conveyancers should be legally required to distribute HMRC provided information to clients about these requirements to raise awareness.

It has been reported however, that HMRC may be reluctant to see this 30-day limit extended, as it raised more than £1.3m in late filing penalties during the last six months of 2020.

Second homes and Principal Private Residence Relief

There are also recommendations around Principal Private Residence Relief (PPR). PPR takes main homes outside the scope of CGT. Where taxpayers have more than one eligible home, they can choose which home they wish to benefit from the relief by making a nomination to HMRC.

The OTS believes that there is insufficient awareness of the nomination procedure among the 1.4m people who own second homes. It is also peculiar that nominations are needed even where no capital gain can arise on a rented second home, OTS said.

It recommends that the Government review the practical operation of private residence relief nominations, raise awareness of how the rules operate, and in time enable nominations to be captured through the single customer account.

Divorce and Separation

Another area that is recommended for reform relates to divorce and separation. Married couples or civil partners can currently transfer assets between them without triggering an immediate capital gains tax charge. Divorcing or separating couples continue to benefit from this rule in the tax year in which they separate. However, after that, transfers take place at market value in accordance with the normal CGT rules.

Dodwell said: ‘In 2020 it took an average of a year to secure a divorce in England and Wales. Everyone who commented on this issue considered that limiting the tax rule about these transfers to the tax year of separation gives couples inadequate time to reorder their affairs.’

The OTS recommends that the Government extend the operation of this rule to the later of the end of the tax year at least two years after the separation event, and any reasonable time set for the transfer of assets in accordance with a financial agreement approved by a court or equivalent processes in Scotland.

Business sales

The OTS has also recommended changes be made for Business Owners.

The proceeds from the sale of a business or land may be received in several different ways. Sometimes the proceeds of a sale might be paid over a number of years, or the proceeds could be a combination of cash and other assets such as shares. In addition, a business can be sold for an uncertain price that depends on future events, as happened when we sold our first business.

Some of these more complex types of business and land sales can create issues where tax needs to be paid before any cash has been received, making it hard to make decisions, and which can be difficult for taxpayers to understand or plan around.

We’ll of course watch the response to the recommendations with interest and will let clients know as soon as any changes are announced. If you’re unsure whether your plans around any of the above may result in a Capital Gains Tax liability, please get in touch. It’s much better to have a conversation before your plans are definite, than find out you may have preferred to structure them differently!