The Office of Tax simplification (OTS) has published a second report into Capital Gains Tax (CGT) following the review of CGT requested by Chancellor Rishi Sunak in July 2020.
Whilst the first report, published in November 2020, considered the policy design and principles of CGT, the second report considers a range of key practical, technical and administrative CGT issues.
This report covers a wide range of key tax issues, including land and property, main homes, business, and administration. As well as this, the report also highlights a wider concern regarding the low-level understanding of CGT amongst the general public, suggesting that CGT rules need to be simplified, and made easier for taxpayers to understand.
Here we summarise the key recommendations from the report.
Awareness and administration
A SINGLE CUSTOMER ACCOUNT FOR REPORTING CGT
The report recommends that the various methods for reporting capital gains (Self Assessment returns, UK Property tax return and the ‘real time’ CGT service) are combined into one Single Customer Account, which would become a central hub to claim and keep track of CGT information.
The account would be a gateway for taxpayers to pay tax in the most appropriate way, and would ease the administrative burden, preventing taxpayers from having to complete a full Self Assessment return just because they need to report a capital gain, for example.
CHANGES TO THE ‘REAL TIME’ CGT SERVICE
Currently, only a small percentage of taxpayers’ report gains early through the ‘real time’ CGT service, with the majority reporting through Self Assessment returns.
The report recommends formalising administrative arrangements for the ‘real time’ service to make it into a standalone CGT return usable by agents. Changing the service into a return with defined rules and deadlines would help facilitate earlier payment, and work towards HMRC’s long term goal of reducing the number of taxpayers needing to complete a Self Assessment tax return.
REPROTING AND PAYMENT DEADLINE FOR UK RESIDENTIAL PROPERTY DISPOSALS
Legislation introduced in April 2020 requires UK residents to submit CGT returns and pay any CGT due within 30 days of completion of the sale of residential property. HMRC has issued over £1.3m in late filing penalties since the introduction of the 30-day window.
The report recommends that the reporting and payment deadline is extended to 60 days to give taxpayers more time to consider whether they have a taxable gain, and if necessary, file a return.
Alternatively, information provided by HMRC should be distributed to clients by estate agents/conveyancers, as many taxpayers only find out about their obligations after they have sold their property.
PRIVATE RESIDENCE RELIEF NOMINATIONS
Private Residence Relief (PRR) allows most homeowners to sell their homes without being liable for any CGT on property profits. Taxpayers with more than one home must nominate a ‘main’ home that they wish to benefit from the relief to HMRC.
The report suggests there needs to be greater awareness in regards to the nomination procedure rules, for the benefit of the 1.4m people in the UK who own second homes. The practical operation of the nominations should also be reviewed, such as the requirement for nominations even when no CGT can arise on a second rented home.
PRIVATE RESIDENCE RELIEF AND GARDEN DEVELOPMENTS
The report recommends that Private Residence Relief (PRR) should be adjusted to cover garden developments, as the current rules on gardens can produce inconsistent tax outcomes.
An example from the report suggests that homeowners who sell their garden to a developer can usually receive full PRR on the sale. However, homeowners who choose to split their own land, and build a new home for themselves to move into, may not receive full PRR on the new home in relation to the period before the house was built.
Divorce and separation
TRANSFERRING OF ASSETS
Married couples or civil partners can transfer assets to each other without triggering an immediate CGT charge, and divorcing or separating couples continue to benefit from this rule in the tax year in which they separate. After this tax year, transfers take place according to the regular CGT rules at market value.
The report considers that the application of this rule to the tax year of separation does not give couples enough time to reorder their affairs, and that the rule on transferring assets should be extended to the later of:
- The end of the tax year at least two years after the separation event
- Any reasonable time set for the transfer of assets in accordance with a financial agreement approved by a court
DEFERRED PROCEEDS ON SALE OF A BUSINESS
When a business or land is sold, proceeds can be received in different ways. They may be deferred over a number of years, or through a combination of cash and assets/shares. A business can also be sold at an uncertain price that is dependent on future events.
These complex sales can create complex tax issues where tax needs to be paid upfront before any cash is received.
The reports suggests that consideration is made to whether CGT should be paid at the time cash is received in situations, such as the above, where proceeds are deferred. The recommendation includes that in these situations, Business Asset Disposal Relief will be preserved.
Land and property issues
ROLLOVER RELIEF AND COMPULSORY PURCHASE ORDERS
Owners of ‘let’ land are not usually eligible to claim rollover relief on sale of the land, but exemptions apply where the land had been compulsorily purchased.
There are technical problems and restrictions with Rollover Relief in compulsory purchase situations including time limits, provisional claims and willingness to sell. These present specific challenges to owners of farming land, and it is expected that this issue will increase in the coming years in relation to Phase One of the HS2 programme.
The report suggests that the Rollover Relief rules should be expanded where land and buildings are acquired under Compulsory Purchase Orders, so that relief is not restricted to ‘like for like’ purchases when there is often a limited availability of land for reinvestment.
In light of the report, Harriet Pye-Watson, Private Client Tax Manager at Smith Cooper comments:
“This comprehensive report highlights the complexities surrounding Capital Gains Tax and the difficulties in navigating the administrative systems. Importantly, the report outlines areas where disparities in the tax system may distort commercial decision making. The recommendations by the OTS would simplify the system and ease some of the current burdens on taxpayers.”
Catherine Desmond, Head of Private Client Services and Landed Estates also commented:
“The recommendations with regards to the tax treatment of compulsory purchase payments are particularly relevant at present as HS2 rolls out. The suggestions for the transferring of assets between divorcing couples would also make that situation less stressful all round.”
Our specialist advisors understand that protecting your wealth is a priority, and can provide a bespoke service to help you negotiate the complexities governing CGT, developing an effective strategy to minimise your tax liability.
If you would like to seek more advice regarding CGT, please get in touch with one of our dedicated tax experts.