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CGT review: where the tax could go

22 October 2020: The Office of Tax Simplification is still collecting evidence for its next big review. Tax Director Bill Dodwell discusses the ins and outs of the process.

Earlier this year, Chancellor of the Exchequer Rishi Sunak tasked the Office of Tax Simplification (OTS) to review Capital Gains Tax (CGT). The goal of the review is to look at broader policy questions around the tax and any specific issues that should be addressed. 

OTS Tax Director Bill Dodwell told a recent ICAEW webinar “it is probably the most significant major tax that we've not had to look at in our 10-year life.”

The Chancellor's letter has asked the department to look at distortions and consider whether aspects of the tax are meeting the policy objectives of the government. 

“We said in our inheritance tax report that in some areas it wasn't clear what the government's policy objective was and essentially invited the government to think what the objectives were. And if they couldn't find any, to get rid of it or make a change. But it's not for us to say what the policy objective ought to be.”

Respondents have been replying to the OTS call for evidence in two periods. The first focused on broad policy objectives, while the second period, which ends on 9 November, looks at the more detailed aspects of the tax. 

“People tell us about problems they've encountered or situations they thought should have been covered by a relief, but weren't,” Dodwell says. “Or a relief they thought they understood but, it actually worked in a different way. That is really helpful when we make a case for putting forward change.”

Dodwell gives an example of the sort of things that could be uncovered. When the OTS undertook the review of Inheritance Tax, it became clear that many people did not understand how Taper Relief works. The resulting recommendations from the OTS were to abolish the relief, alongside reducing the seven-year period in which gifts are added to the death estate to five years.

CGT was introduced in 1965 with a 30% rate in response to people taking advantage of asset management to avoid tax on income. “There was still an arbitrage at that time, in the sense that in the 60s, tax rates were much higher than they are today,” comments Dodwell.

Around £8-10bn a year is raised through CGT, from an average of 260,000 taxpayers. Over the course of a decade, however, up to 1.5m people pay CGT over that period. The majority of people paying the CGT are liable for tax at basic rate or within the allowance, but about 40% are liable to the higher rate or additional rate, which brings in most of the yield. Most people liable for the tax are over 45, which ties in with other data showing that older people own a greater share of assets than younger people. 

Some people would like to see CGT come in line with income tax, with others favour lower rates. Most academics back linking the income tax and CGT rate. Certainly, that was the view in the earnings report produced by the Institute for Fiscal Studies, under the leadership of Sir James Mirrlees, and recent work from a couple of younger academics, Dr Andy Summers from LSE and Dr Aaron Advani from Warwick, who argued that some people realise Capital Gains every year and make a lot of money out of it. In their view, the rate should be equalised to prevent some people benefiting from lower Capital Gains Tax rates on what they very much see as income.

OTS is not looking at large company CGT, CGT groups or re-organisations and demergers. “But we are looking at everything that affects individuals and capital gains within a business, which will be relevant to a particular medium-sized, or smaller business,” concludes Dodwell