No need to overhaul CGT, says ICAEW
11 November: While targeted measures could provide greater clarity and improve the administration of capital gains tax (CGT), the current regime is fit for purpose, ICAEW tells Office of Tax Simplification (OTS).
In its response to the OTS review of CGT, ICAEW’s Tax Faculty concludes that “the scope and boundary of CGT is generally clear” and that system “largely achieves” its policy intent of discouraging schemes that seek to convert income into a capital gain for tax purposes.
It concludes that while some administrative and legislative improvements are possible, particularly with regards payments and the application of Principal Private Residence Relief (PPR), changes are unlikely to raise significant revenue without a major structural change to reliefs.
Published as ICAEW Rep 105/20, the Tax Faculty’s response to the OTS call for evidence suggests that one area that needs to be reviewed was the reporting and payment of CGT. It argues that the ways in which individuals report and pay CGT have become more fragmented. While most CGT is reported and paid alongside income tax self assessment returns, in recent years HMRC has introduced new CGT systems that have added complexity.
ICAEW highlights the system introduced in April 2020 to enable the 30-day reporting and payment of CGT on residential properties as “very problematic”. The faculty argues that the online service cannot be easily found on gov.uk, and that it is not clear why a separate CGT account and additional agent authorisation is required.
It concludes that: “There needs to be a strategic look at the reporting and payment of CGT and whether it should sit alongside income tax self assessment or be completely separate. At the moment we have a confusing mix.”
Other areas in which targeted measures could potentially be considered include PPR, where the current regime could be modernised to reflect that couples may be married but living apart in separate main residences. The faculty also suggests that the coronavirus pandemic has highlighted that “a nine-month period final period of ownership exemption is insufficient in the current market”. Finally, it concludes that PPR nominations could be simplified if UK residents could, like non-residents, make nominations on disposal.
The faculty also argues that the CGT no-gain/no-loss tax treatment given to married couples or civil partners separating is “capricious and unfair” given that it only applies to the end of the tax year of separation. This means some couples benefit for a whole year, while for others it could be a single day depending on the date of separation. A better solution, the faculty suggests, is to follow the example of inheritance tax and have the treatment apply to all transactions between couples until they receive their decree absolute (or final order).
In considering chattels, the faculty argues in favour of increasing the £6,000 exemption in line with inflation, given that the amount hasn’t been altered since April 1989.
When asked to reflect on the different rates of CGT in use, the faculty concluded that the structure of rates is particularly important for CGT as the taxpayer will often be able to choose when to make disposals.
The representation states: “The current rates are intended to reflect the fact that following the removal of indexation and taper relief for individuals, the calculation of gains does not take into account the length of time an asset has been held or inflation; this is the policy basis for CGT rates being lower than income tax rate.
“The extent to which CGT should be payable on gains arising from inflation and how it should be mitigated is a policy matter for government and parliament to determine.”