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OTS concludes CGT can distort behaviour

12 November: In the first report in its review of Capital Gains Tax (CGT) the Office for Tax Simplification (OTS) outlines where it believes the current regime is distorting taxpayer behaviour and suggests potential changes.

The OTS has published what it describes as a “framework of policy choice” for the government to consider in the future design of the CGT regime.

In the first of two reports on CGT, the OTS concludes that there are several areas in which the regime is “counter-intuitive, creates odd incentives, or creates opportunities for tax avoidance”.

It goes on to outline 11 recommendations for the government to consider across four key areas: rates and boundaries with income tax; the annual exempt amount (AEA); capital transfers and business reliefs.

Specific suggestions include:

  • aligning capital gains tax rates with income tax rates or perhaps re-considering the boundary between the two regimes, such as when taxing retained earnings on the liquidation of a small owner-managed company;
  • reducing the level of the AEA;
  • removing the capital gains uplift on death in some circumstances;
  • scrapping investors relief; and
  • replacing business asset disposal relief with an alternative more focused on retirement.

The 135-page report is the first of two that the OTS will be publishing in its review of CGT requested by the Chancellor in July 2020. This report focuses on policy design and the principles behind the tax and was based on consultation responses gathered over the summer.

The OTS acknowledges that the report was produced in a shorter than usual timeframe and recognises that “there are wider policy tradeoffs for government to make and that further, more detailed, work would be involved in taking forward specific recommendations”.

For example, its recommendations include the suggestion that if government wanted to more closely align CGT and income tax, then it would need to consider reintroducing a form of relief for inflationary gains and consider the interactions with the tax position of companies.

The second report in the OTS review will focus on technical areas and the administration of the regime. The consultation for this report closed on 9 November and you can read ICAEW’s response in ICAEW Rep 105/20.