They also believe that the boundary between income and capital gains is under pressure from the use of share-based remuneration and the accumulation of retained earnings in smaller owner-managed companies.
So the direction of travel depends on what the government wants to achieve with the tax policy itself and any potential simplification. Does it want to change the behaviour of people and businesses? Or make the tax and any potential liability easier for taxpayers to understand and predict?
OTS Recommendations
- If the government wants simplification to reduce any distortions in behaviour, the OTS recommends it consider
- aligning the rates of CGT and income tax; or
- addressing boundary issues between the two
If rates were more closely aligned, it would greatly reduce the need for complex rules to monitor the boundary between income and capital gains as the way ‘income’ is classified would not have such an effect on its tax position.
- If the government did look at aligning rates, it should also consider:
- reintroducing a relief for inflationary gains;
- allowing a more flexible use of capital losses; and
- looking at how family investment companies could be used for future tax avoidance.
- If the government wants to make it easier for taxpayers to understand and predict their own tax liabilities, it should reduce the number of rates and the extent to which liabilities depend on the overall income of taxpayers and the extent to which they straddle the various bands.
- The government should further investigate whether employees’ and owner-managers’ rewards from personal labour (as distinct from capital investment) are treated consistently and consider taxing share-based employment rewards and some retained earnings in smaller companies at Income Tax rates.
2) The Annual Exempt Amount
The current annual exempt amount for CGT is £12,300.
The data provided by HMRC to the OTS showed that, after allowable losses, 263,000 people reported gains for the 2017/18 tax year and it is thought that 50,000 people had net gains just below the threshold.
It is for the government to decide what the policy objective of any threshold is but the annual exempt amount has been described over time as one or more of the following:
- an administrative de minimis, to reduce the number of people who have to submit information and tax returns
- a broader more substantive relief, comparable to the Income Tax personal allowance
- a blunt tool to compensate for inflation
