On Wednesday 11 November 2020, the Office of Tax Simplification (OTS) published its first report[1] into the review of capital gains tax (CGT) reform following a request from the Chancellor, Rishi Sunak, in mid-July 2020, inter alia, to “ensure the system is fit for purpose”.

This report covers policy design and the principles underpinning the taxation of capital gains in the UK, which the OTS finds to be “counter-intuitive” and creates “odd incentives”.  A further report is to follow early next year which will deal with more detailed technical and administrative issues.

It is slightly peculiar that this set of suggestions was released last week, when in fact detailed responses to the second part of the OTS CGT review were submitted for the deadline of Monday 9 November 2020 – we as a firm have been involved in this.  It is to be hoped last week’s recommendations do not colour the review of responses submitted last week.

Background

Faced with needing to find up to £40 billion a year in cuts or additional revenue[1] to plug the deficit wrought by the unprecedented levels of government spending during the pandemic, and on the basis that he sees it as his “sacred duty to re-balance the books”, it seems somewhat inevitable that there will be some form of tax changes on the horizon when Rishi Sunak appears at the despatch box to deliver his Budget in March 2021. 

For various reasons (both fiscal and political), CGT seems to be very much in the Chancellor’s sights as a potential target for raising this much-needed revenue for the Treasury’s depleted coffers, despite it not bringing in nearly as much revenue as that of tax on income or consumption.

At present, anyone selling shares, a second home or other assets which have gained in value, is liable to pay CGT on the profits they have made from the sale.

What does the OTS recommend?

The OTS has put forward 11 recommendations for the Treasury to consider implementing, which, according to one of the figures it cites, could raise up to £14 billion a year.  At a third of the amount the IFS says the Treasury needs, one can see why the Chancellor may be tempted to listen carefully to what the OTS has to say. 

All the more so, those who stand to lose out most as a result of any changes to the way capital is taxed, such as investors, owner-directors of small companies, and second home owners, would be wise to listen, too, and consider their options now before Spring 2021.

The two recommendations which have grabbed most of the headlines are a proposal to make CGT rates “more closely aligned” with those of income tax, and to lower the annual allowance, which would have the effect of doubling the number of people who become liable to pay the tax each year.

Drilling-down, other recommendations from the OTS which clients should be aware of include:

• Taxing carried interest which private equity executives receive, as well as accrued profits for owner-directors of private companies, as income (at 40% or 45%) rather than capital (at 20%).
  
  
• Following to its curtailment in March 2020, a further reduction in the scope of, or potential abolition of, the so-called “mistargeted” business asset disposal relief (BADR), formerly entrepreneurs’ relief, which currently provides for a lifetime limit of £1m (previously £10m) of being able to dispose of qualifying assets at 10% (rather than 20%).
  
  
• The removal of the “uplift on death” relief which currently allows beneficiaries to inherit an asset at market value on the date of death rather than the  value on the date of purchase, or, instead, an amendment of this relief so that assets are re-based to 2000, for instance, rather than the date of death.

Conclusion

It remains to be seen whether Rishi Sunak will implement any of the recommendations suggested by the OTS in March 2021, particularly given the Treasury has not (yet, at least) adopted the OTS’ previous recommendations on inheritance tax reform, for instance, and has no obligation to do so.  Indeed, a colleague of the Chancellor is on the record as referring to the OTS as “a bunch of wonks”!

The Chancellor should think carefully before adopting any of these reforms, which would mark a sea change in recent UK tax policy.  He should also consider any reform of capital taxes in the round – let us not forget the Wealth Tax Commission has only recently released its own suggestions, with a further final report due in December, and it is vital that any reform is looked at comprehensively and not in a piecemeal way.  Perhaps the coronavirus is the catalyst that will spark this change, but, arguably, the approach to taxing capital over recent decades has contributed to the UK’s global tax competitiveness.  To tinker with it now may well have the undesirable effect of driving investment away, with an exodus of private equity, just when the UK most needs an entrepreneurial spirit to kick-start a much-needed economic recovery. 

Nevertheless, it would be wise for investors, private equity executives and owner-directors (amongst others) as well as anyone else holding assets standing at a significant gain, to take the contents of the report seriously and take advice on their options over the next few months.

For more information please contact James Bradford at james.bradford@crsblaw.com or Charlie Searle at charlie.searle@crsblaw.com.

[1] IFS report, October 2020
[2] Link to OTS report