Government Response to OTS’s CGT Review

 In Market Intelligence

The Treasury have formally replied to the Office of Tax Simplification (OTS) on the recommendations put forward in their May 2021 report on the review of Capital Gains Tax (CGT).  The full response, that also includes conclusions of the Treasury’s review of the OTS and a response to the OTS’s Inheritance Tax (IHT) review report from July 2019, can be read in full here.

In summary, the Treasury have endorsed the importance of the OTS and the work it does.  The Chancellor has now asked the OTS for a formal review to “undertake a project to articulate its approach to and interpretation of ‘tax simplification’, including clarifying its aims as an organisation, and the success measures for assessing its progress”.

With regards to the OTS’s review of IHT, the Treasury apologised for the delayed response to their July 2019 report and announced that they would not be taking forward any of the suggested recommendations.

The OTS produced two reports as part of their consultation and review of CGT.  The first report, published in November 2020, focused on the policy design and principles underpinning CGT.  It contained recommendations for rates and boundaries, annual exemptions, capital transfers and business reliefs.  The Treasury response does not provide any indication as to whether any of these recommendations will be accepted, including changing the rates for CGT and aligning them to income tax levels.  Though it does say that “these reforms would involve a number of wider policy trade-offs and so careful thought must be given to the impact that they would have on taxpayers, as well as any additional administrative burden on HMRC”.  So further announcements on rates and exemptions may still be a possibility.

However, the response does announce that the Treasury have accepted some of the recommendation from the OTS’s final report on CGT from May 2021.  The report included 14 recommendations, of which five have been accepted and a further five are still being considered.  The table below, from the Treasury’s response, provides further details.

  OTS Recommendation Government Response

1

HMRC should integrate 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. Accept – The Government understands the case made to improve CGT and related services for customers and will consider this recommendation as part of the delivery of the Single Customer Account (SCA). SCA service development is a long term strategy for HMRC.

2

The government should formalise the administrative arrangements for the ‘real time’ Capital Gains Tax service, effectively making it a standalone Capital Gains Tax return that is usable by agents. Consider – The Government understands the case made to improve CGT and related services for customers and will consider this recommendation as part of the delivery of the SCA. SCA service development is a long term strategy for HMRC.

3

The government should consider extending the reporting and payment deadline for the UK Property return to 60 days, or mandate estate agents or conveyancers to distribute HMRC provide information to clients about these requirements. Accept – The Government announced at the Autumn Budget that the time limit for making a CGT return and associated payments on account when disposing of UK land and property has been extended from 30 to 60 days.

4

The government should consider whether individuals holding the same share or unit in more than one portfolio should be treated as holding them in separate share pools. Consider – The Government understands the scope of this recommendation as set out in the detailed report but needs to consider this further to determine the implications of this proposal on all securities.

5

The government should consider adjusting Private Residence Relief to cover developments in a taxpayer’s garden which the taxpayer subsequently occupies. Reject – The Government has considered the application of Private Residence Relief (PRR) and is satisfied with the current rules. These provide consistency for individuals who construct a new residence for themselves which later becomes their main home, regardless of whether that residence is in the garden of an existing home or on land elsewhere.

6

The government should review the practical operation of Private Residence Relief nominations, raise awareness of how the rules operate, and in time enable nominations to be captured through the Single Customer Account. Consider – The Government will review the position as regards PRR nominations further, taking into account existing guidance, the concerns raised, and the recent changes to the operation of the nomination rules in Finance Act 2020, which allow late nominations in certain circumstances. The Government understands the case made to improve CGT and related nomination services for customers and will consider their recommendation as part of the delivery of the SCA. SCA service development is a long term strategy for HMRC.

7

The government should extend the ‘no gain no loss’ window on separation to the later of: i) the end of the tax year at least two years after the separation event; or (ii) any reasonable time set for the transfer of assets in accordance with a financial agreement approved by a court or equivalent processes in Scotland. Accept – The Government agrees that the ‘no gain no loss’ window on separation and divorce should be extended and will consult on the detail over the course of the next year.

8

The government should consider whether Capital Gains Tax should be paid at the time the cash is received in situations where proceeds are deferred such as on the sale of a business or land, while preserving eligibility to existing reliefs. Reject – The Government has considered this recommendation and is satisfied with the existing rules.

9

The government should consider enabling an irrevocable provision in the documentation for a corporate bond to specify that it is subject to Capital Gains Tax, and for the absence of such a provision to mean that it is exempt. Consider – The bond market and tax rules have changed considerably since the introduction of the CGT exemptions for both Corporate Bond and Government Gilt-edged Securities (Gilts). The Government intends to consider this point further within the context of a wider review into the purpose and functioning of those exemptions.

10

The government should review the rules for enterprise investment schemes, with a view to ensuring that procedural or administrative issues do not prevent their practical operation. Consider – The Government recognises that a review of these schemes is advantageous. Whilst the Government will consider this recommendation further, it will do so in the context of the income and CGT functions of the relief.

11

The government should consider whether gains or losses on foreign assets should be calculated in the relevant foreign currency and then converted into sterling. Reject – The Government has considered this recommendation and concluded that calculating gains and losses on foreign assets in their relevant foreign currency, rather than in sterling, would benefit some taxpayers and disadvantage others in comparison to the current rules, as currency fluctuations would continue to be a factor. As such, the Government does not intend to make this change.

12

The government should expand the specific Rollover Relief rules which apply where land and buildings are acquired under Compulsory Purchase Orders (CPO). Accept – The Government agrees that expanding Rollover Relief to cover reinvestment in the form of enhancing land already owned meets the spirit of the initial rationale of the relief and will consult on the detail in due course.

13

The government should consider exploring ways of removing inappropriate Corporation Tax or Capital Gains Tax charges where a freeholder is in effect only extending their own lease. Reject – The Government has considered this recommendation and is satisfied with the existing rules.

14

HMRC should improve their guidance in the following specific areas such as:  UK Property Tax Return; Lodgers and people working from home; When a debt is a debt on a security;  When a loan to a business becomes irrecoverable;  When Business Asset Disposal Relief could apply to farmers or others looking to retire over a period of time;  Enterprise investment schemes;  Land assembly arrangements;  and Flat management companies. Accept – The Government agrees with this recommendation. HMRC has already completed review and expansion of the guidance on the UK Property Tax Return which will be published shortly and will proceed to the other areas of guidance listed in due course.

As previously stated, FSL continue to monitor potential policy changes to ensure there is minimal disruption to CGiX users.Owve

If you have any concerns about the impact of the review on CGiX or would like to discuss further then please contact:    FSLBA&I@financialsoftware.co.uk

 

 

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