Alarm bells will be ringing for many taxpayers and their advisers following the report published by the Office of Tax Simplification (OTS) on 11 November 2020. Its recommendations, which are made independently to the Government, have the potential to increase capital gains tax (CGT) revenues by billions of pounds and could aid the Government in funding its response to the current pandemic. There is also a counter argument that a reduction in rates, whether temporary or permanent, could assist by providing an economic stimulus. There is real concern that the proposed changes, if brought into law, could lead to significant tax increases, both in terms of headline rates and also in terms of reliefs available. This may result in changes to investment behaviour as well as changes to the structuring of family businesses and in wealth planning generally. The OTS has suggested that:

• CGT rates should be more closely aligned with the higher rates of income tax so that the tax system is more ‘neutral’. The report anticipates that doing this could result in an additional £14 billion of tax revenue per year. This assumes that taxpayers carry on as before and that no other changes are made to soften the effect that the increased rates would have; and
• The annual exempt amount (AEA) be reduced from £12,300 to £5,000. This would bring more individuals within the CGT tax net but could also deter affected taxpayers from realising similar levels of gain. In order to make tax compliance easier for affected taxpayers, the OTS has recommended that investment managers be required to report CGT information to taxpayers and to HMRC.

This is the first report from the OTS as part of a two-stage review of the UK’s CGT regime. A second report, which is expected in early 2021, will explore technical and administrative issues in greater detail once the OTS has considered the responses to its second call for evidence. Given the content of the first report, the second report is likely to receive a lot of attention.

“Past performance is not a reliable guide to the future. The value of investments and the income from them can go down as well as up. The value of tax reliefs depend upon individual circumstances and tax rules may change. The FCA does not regulate tax advice. This newsletter is provided strictly for general consideration only and is based on our understanding of law and HM Revenue & Customs practice as of December 2020 and the contents of the Finance Bill. No action must be taken or refrained from based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case.”