While the Office of Tax Simplification’s (OTS) latest report suggests a number of welcome improvements, these are relatively minor, and the report does not tackle the major issue that the overall CGT regime is far too complex and requires a complete overhaul if it is genuinely going to be fit for purpose. At its basic level, there are five different rates of CGT that could apply to a transaction, and this is not addressed anywhere.
This is the second report on the issue and follows the November 2020 report after Chancellor Rishi Sunak had commissioned a review on how the CGT regime could be simplified.
The latest OTS report is a marked improvement on the November 2020 submission, as it offers a number of areas where the regime could be genuinely simplified. The first report from the OTS contained quite radical proposals to change the CGT regime and align the rates to Income Tax, which was a policy direction rather than simplification, and the proposals could have actually led to more complexity.
At the time of the November report, there was widespread panic that CGT rates would materially increase, forcing a number of individuals to accelerate transactions to before the end of the 2020/21 tax year to escape the threat of a penal rate increase. The recommendations from the OTS in this second report focus mainly on the administrative issues of CGT and contain a welcome set of proposals.
The OTS offers 14 points of recommendations covering a broad area of the tax, from how the Capital Gains rules in relation to the main residence should be updated, to improvements in HM Revenue & Customs’ (HMRC) guidance.
A welcome proposal from the OTS is to extend the timeframe to submit a CGT return when selling a UK residential property from 30 days to 60 days. However, HMRC may be reluctant to see the timeframe extended, as it managed to raise over £1.3m of penalties from late filers in the last six months of 2020.
The OTS suggest changing the rules around the tax point of certain transactions where payments are deferred and made over a period of time – under the current rules, everything is taxed upfront, even though payments may be spread over several years, leading to cash flow difficulties. Most taxpayers find this rule illogical and often question why they should be taxed on something when they haven’t received the cash sum.
The OTS’ report also covers how foreign transactions should be calculated when considering exchange rate movements, the rules for share transactions held across multiple investment portfolios and how transfers between divorcing couples could be simplified.
The OTS admit that taxpayers lack an awareness of the CGT rules and how transactions should be reported, and HMRC’s guidance and processes need to be more intuitive.
The two reports combined do not really offer much in the way of simplification, and much more could be done. However, the sentiment in the latest report provides a more reassuring direction around CGT, but the threat of a future CGT rate increase should not be ruled out.
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