Capital Gains Tax changes proposed – second report published by the Office of Tax Simplification

Capital Gains Tax changes have been proposed to the Government by the Office of Tax Simplification in its second report on the subject ‘Simplifying practical, technical and administrative issues’.

The first of these two reports, published in November 2020, considered the policy design and principles underpinning the tax and made a wide range of recommendations, including significant increases to Capital Gains Tax, bringing it more in line with income tax rates. The Government is yet to action any of the recommendations in this report and it remains unknown what recommendations, if any it will follow.

This second report, published on 20 May 2021 looks at various areas including moving home, divorce, issues relating to land transactions and running or investing in a business. The report also emphasises concerns regarding low level of public awareness of Capital Gains Tax together with the extent in which the administrative systems could significantly support taxpayers more.

The report makes 14 recommendations across a range of different areas, three which aim to make a difference over the longer term, 4 standalone recommendations and 6 recommendations regarding issues that affect a significant number of people. In addition to these, there is also broader guidance recommendations, which highlight 8 specific areas where the report considers that existing guidance by HMRC needs to be improved.

Three key proposals include the 30-day Capital Gains Time limit relating to the sale of residential property, Capital Gains Tax issues relating to divorce and Capital Gains Tax as it relates to business issues:

Capital Gains Tax changes proposed to the 30-day reporting of residential gains

The report highlights the difficulties that many taxpayers are facing calculating and reporting capital gains tax within 30 days from completion of a residential sale, following legislation introduced on 6 April 2020. We have recently reported on this and you can read more about this in our article “The 30 day rule for Capital Gains Tax on residential property”

Divorce and Capital Gains Tax changes

The report also makes recommendations concerning capital gains between separating spouses, where it believes that the current timescale is inadequate to transfer assets, before a Capital Gains Tax liability occurs.

Separating married couples get the same treatment as married couples in the tax year that they permanently separate and can continue to be made on a ‘no gain no loss’ basis for the duration of that tax year. However, if they were to separate on the last day of a tax year, and a transfer takes place following this, even the next day, the transfer is treated as taking place at market value and a capital gain may be charged, even if no cash has changed hands.

The recommendation by the OTS is to allow more time for separating couple, extending the ‘no gain no loss’ window to the end of the tax year at least two years after separation, or a reasonable time set for the transfer of assets, which is in accordance with a financial agreement approved by a court, if this is longer (with a variation of this to apply under Scottish law).

Capital Gains Tax and business issues

The OTS raises the issues if Capital Gains Tax should be paid at the time cash is received where proceeds are deferred such as on the sale of a business or land, whilst preserving eligibility to current reliefs. This would have clear benefits for businesses.

It is also suggests allowing an irrevocable provision in documentation for a corporate bond which specifies that it is subject to capital gains tax and in the absence of such a provision, this to mean that it is exempt.

The full list of recommendations by the OTS for capital gains tax changes are as follows:

Awareness and administration recommendations

• The OTS recommends that HMRC integrates the different ways of reporting and paying capital gains tax into the Single Customer Account, making it a central hub for reporting and storing Capital Gains Tax data.
• That the Government formalises the administrative arrangements for ‘real time’ Capital Gains Tax service, effectively making it a standalone capital gains tax return that is usable by agents.
• As highlighted, the OTS recommends that the Government considers extending the reporting and payment deadline for UK property tax returns to 60 days, which has now been implemented.
• It is also recommended that the Government considers if individuals holding the same share or unit in more than one portfolio should be treated as holding them in separate share pools.

Recommendations regarding main homes

The OTS believes that the Government should consider amending Private Residence Relief in order to include developments in a taxpayer’s garden which is subsequently occupied by the taxpayer.

It is recommended that Government reviews the practical operation of private residence relief nominations, raises awareness of how the rules work and enables nominations to be captured through the Single Customer Account over time.

Divorce and separation recommendations

As previously mentioned, the OTS believes that the Government should extend the ‘no gains no loss’ window on separation. It recommends this to be later of the end of the tax year at least two years after separation or a reasonable time set for the transfer of assets, which is in accordance with a financial agreement approved by a court (or equivalent in Scotland)

Recommendations regarding business issues

As previously highlighted, the OTS recommends that the Government considers if Capital Gains Tax should be paid at the time the cash is received where proceeds are deferred such as on the sale of a business or land, whilst preserving eligibility to current reliefs.

It is also recommended that consideration should be given in allowing an irrevocable provision in the documentation for a corporate bond which specifies that it is subject to Capital Gains Tax and in the absence of such a provision, this to mean that it is exempt.

Recommendations concerning investor issues

The OTS recommends that the Government reviews the rules for enterprise investment schemes (EIS), by in which it ensures that procedural or administrative issues do not prevent the practical operation of an EIS.

It also believes that it should review whether gains or losses on foreign assets should be calculated in the relevant foreign currency before being converted into sterling.

Recommendations regarding land and property issues

The OTS recommends that the Government expands specific Rollover Relief rules when they apply to land and buildings that are acquired under Compulsory Purchase Orders.

It is also recommended that it considers exploring how to remove inappropriate Corporation Tax or Capital Gains Tax charges, where a freeholder is in effect only extending their lease.

Capital Gains Tax changes – Guidance to HMRC for the Office of Tax simplification

The Office of Tax Simplification also recommendations that HMRC improves its guidance concerning eight areas, these are as follows:

• Concerning the UK Property tax return
• Regarding lodgers and people who work from home
• In circumstances where a debt is a debt on a security
• In circumstances where a loan to a business becomes irrecoverable
• Business Asset Disposal Relief where it could apply to farmers or others looking to retire over a period of time
• Enterprise Investment Schemes
• Land assembly arrangements
• Flat management companies

Which Capital Gains Tax changes are likely?

The previously recommended increased by the Office of Tax simplification in the first part of this report, suggested bringing capital gains tax more in line with income tax, which could lead to a significant increase to Capital Gains Tax, especially on the sale of homes that do not qualify for Private Residential Relief. Further information regarding the recommendation in this first report can be found here.

The 30-day rule for reporting gains from residential property was extended to 60 days in the October 2021 Budget, in line with these recommendations.

Whilst the Chancellor did himself request the review by the Office of Tax Simplification in July 2020, the Government hasn’t yet responded to these reviews and it remains unknown what, if any recommendations it will follow.

How Alexander & Co can assist you

It is important to consider obtaining tax advice as soon as possible, to plan for all future eventualities and have a plan in place to deal with these effectively. This includes a wide range of tax issues, from employment income, shares and business interests, through to matrimonial issues, succession planning and forward planning for inheritance tax. Taking a holistic, pro-active approach as early as possible will make best use of your resources and allow you to plan effectively.

Whether any Capital Gains Tax changes take place in the short to medium term or not, it is always prudent to make sure that you are always utilising all available tax relief available and plan for future events.

Our expert team of tax advisors can undertake a review on your behalf and make recommendations based on your circumstances to ensure you take full advantage of current reliefs and allowances and plan proactively for the future.

For further assistance and to discuss becoming a client, contact us today by email at info@alexander.co.uk or complete our contact form here and we will be in touch.