The latest report from the Office of Tax Simplification review into capital gains tax makes recommendations in areas such as the UK residential property return, moving home, divorce and separation. It also highlights the low level of public awareness and where improved guidance is needed.
The Office of Tax Simplification (OTS) review into capital gains tax (CGT) was requested by the Chancellor in July 2020. The first report, published in November 2020, focused on policy and design considerations.
The second report, published on 20 May 2021, considers practical, technical and administrative improvements that could be made. Many of recommendations reflect the need to modernise rules and guidance so that they align with the way people live today rather than when CGT was introduced in 1965.
ICAEW’s Tax Faculty says that, given the numerous, ongoing problems associated with its introduction including one-third of taxpayers missing the deadline, the recommendations on the UK residential property CGT service are likely to attract the most attention. As well as improvement to the service itself, the faculty would like to see both a longer period for reporting and a requirement for vendors to be provided with information on the reporting obligation.
ICAEW welcomes the practical recommendations made by the OTS and agrees with the consensus that separating couples need more time in which to make no gain/no loss transfers and that there is scope to improve the rules around principle private residence relief while retaining the government’s commitment to keep homes out of CGT.
The fourteen recommendations cover:
Awareness and administration
The OTS recommends that the different ways of reporting capital gains and losses be integrated into the single customer account and that the real time CGT reporting service be formalised and made available to agents.
Other recommendations include extending the deadline for reporting capital gains on UK residential property from 30 days to 60 days or mandating estate agents or conveyancers to provide information to vendors, as well as improving guidance on this service.
The OTS also suggests that the government consider treating those holding the same share or unit in more than one portfolio as holding them in separate share pools, to avoid the need to rework the figures in the reports from different fund managers.
The report suggests that the government considers removing an anomaly that affects the availability of private residence relief where a taxpayer occupies a property that they have developed in their own garden.
The OTS considers that there is no realistic alternative to private residence nominations but recommends that the process be reviewed, including raising awareness of the rules and allowing nominations to be captured through the single customer account.
This section includes a lot of detail on areas that the government might consider, such as the possibility of nominations being made on disposal and whether the need for a nomination where one of two available properties is a short-term rental property might be removed.
It also suggests that the government considers whether the ancillary reliefs for periods living or working elsewhere meet the policy objective, particularly the unlimited relief for homeowners who become permanently non-resident after purchasing a home in the UK.
The reports highlights guidance on non-residential use, including confirmation that homeworking will not result in a restriction of relief and also on lodgers, need updating and modernising.
Divorce and separation
The OTS reports that all those who responded agreed that the length of time given to separating couples to make no gain/no loss transfers is inadequate. The OTS recommended that this be extended to the later of:
- the end of the tax year at least two years after the separation event, or
- any reasonable time set for the transfer of assets in accordance with a financial agreement approved by a court or equivalent processes in Scotland.
The report explores the treatment of deferred consideration for disposals of business assets. It suggests that the government consider whether CGT 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.
It also suggests considering enabling an irrevocable provision in the documentation for a corporate bond to specify that it is subject to CGT, and for the absence of such a provision to mean that it is exempt.
The enterprise investment schemes are full of potential pitfalls and the OTS suggests that the government should review the rules, with a view to ensuring that procedural or administrative issues do not prevent their practical operation.
In relation to foreign assets, the OTS suggests that the government should consider whether gains or losses should be calculated in the relevant foreign currency and then converted into sterling.
Land and property issues
The report suggests that the government should expand the specific rollover relief rules which apply where land and buildings are acquired under compulsory purchase orders.
The rules around land pooling are considered and the OTS notes that this is a complex area with no obvious solutions, although specific, more comprehensive guidance and a clearance procedure would be helpful.
The OTS also suggests that the government should consider exploring ways of removing inappropriate corporation tax or CGT charges for leaseholder-owned flat management companies where a freeholder is in effect only extending their own lease and that further consideration be given to the tax implications of flat management companies transferring freeholds to commonhold.
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