Capital gains tax (CGT) was introduced in 1965 with the aim of charging tax on gains which would otherwise have been tax-free. Although aspects of the tax have been reviewed and changed over the succeeding decades, I do not recall as far-reaching a review as that announced by the Office of Tax Simplification (OTS) today.
The Chancellor of the Exchequer has asked the OTS to identify and offer advice to the Chancellor about areas where the current CGT rules do not meet their policy intent or where they distort behaviour. The OTS has also been asked to identify simplification opportunities relating to administrative and technical issues affecting individuals, partnerships and unincorporated or single-entity owner-managed companies.
In the course of its work, the OTS will research widely among all stakeholders. It is tasked with producing a fair and efficient tax which fosters the productive use of assets. It will also be mindful of the impact of the recommendations on the Exchequer, on the tax gap and on compliance.
The use of an online and, by the standards of the tax world, light-hearted capital gains tax survey to launch the review confirms the OTS’ intention of securing the widest possible participation in the evidence-gathering process. That process is divided into two parts. First, responses on the principles of capital gains tax are invited by 10 August 2020. Second, responses to the main call for evidence covering all aspects of CGT are required by 12 October 2020.
No dates have been given for changing the CGT system. The expectation is that the Chancellor will outline the next steps during his autumn Budget with draft legislation debated in 2021 and coming into force in April 2022 at the earliest.
What do we know about the likely changes? Clearly, it’s far too early to be definite. However, recent debates provide significant clues. For example the fact that, in 2017/18, 62 per cent of CGT came from those who made gains of £1 million or more, around 3 per cent of CGT taxpayers, suggests that rates of tax are likely to increase. Higher tax rates mean that tax reliefs become even more valuable so we can expect a debate about the value for money offered by reliefs such as entrepreneurs’ relief and the main residence relief. Both are likely to continue, but each may be curtailed.
Capital gains tax may be about to lose its attractions as a relatively low-tax environment for the wealthy. It will be some time before the final form of the new CGT regime is known. If you’d like to help shape that regime by responding to the call for evidence, you can do so by emailing email@example.com.