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November 8, 2023
The second part of a sweeping review of Capital Gains Tax (CGT) has been published with 14 key recommendations.
In July 2020, the Chancellor asked the Office of Tax Simplification (OTS) to carry out a review, to “identify opportunities relating to administrative and technical issues as well as areas where the present rules can distort behaviour or do not meet their policy intent”.
Given the wide scope of the review, the OTS has produced two reports. The first report ‘Simplifying by Design’ was published in November 2020 and considered the policy design and principles underpinning the tax.
This second report covers a wide range of areas – from moving home to getting divorced, running or investing in a business and issues affecting land transactions.
It also highlights a broader concern about the low level of public awareness of the tax and the extent to which the administrative systems could do much more to support taxpayers.
The report makes 14 recommendations, including in the following areas.
Integrating Capital Gains Tax into the Single Customer Account
There are three main ways of reporting a capital gain – through Self-Assessment, the UK Property tax return for disposals of UK residential property and the ‘real time’ Capital Gains Tax service.
The OTS recommends that HM Revenue & Customs (HMRC) integrate these into the new Single Customer Account, making it a central hub for Capital Gains Tax data, to ease the administrative burden for the 500,000 or so people who file returns of disposals in a typical year.
UK Property tax return
Around 150,000 individuals make a disposal of UK residential property each year, 85,000 of whom have a taxable gain and need to file a UK Property tax return within 30 days.
Even with adequate awareness and preparation, the OTS considers that 30 days is a challenging deadline, even if this return were integrated into the Single Customer Account.
The OTS recommends that the Government consider extending the reporting and payment deadline for the UK Property tax return to 60 days, or mandate estate agents or conveyancers to distribute HMRC provided information to clients about these requirements.
Private Residence Relief nominations
Private Residence Relief takes main homes outside the scope of Capital Gains Tax. Where taxpayers have more than one eligible home, they can choose which home they wish to benefit from the relief by making a nomination to HMRC.
At present, there is insufficient awareness of the nomination procedure among the 1.4 million people who own second homes. It is also peculiar that nominations are needed even where no capital gain can arise on a rented second home.
The OTS recommends that the Government 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.
Divorce and Separation
Married couples or civil partners can transfer assets between them without triggering an immediate Capital Gains Tax charge.
Divorcing or separating couples continue to benefit from this rule in the tax year in which they separate.
However, after that, transfers take place at market value in accordance with the normal Capital Gains Tax rules.
Treatment of deferred proceeds when a business is sold
Some of these more complex types of business and land sales create practical tax issues which can result in tax needing to be paid upfront before any cash has been received, distorting commercial decision-making, and which are difficult for taxpayers to understand.
The OTS recommends that the Government 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.
At the moment, the recommendations above are just proposals for the Government to consider when amending or creating tax legislation. However, if any changes occur to Capital Gains Tax legislation, we will be sure to update you.