Capital Gains Tax  

Understanding the OTS's capital gains tax review

  • Explain the key points made in the OTS report
  • Identify the challenges with how CGT and IHT interact
  • Explain the prospects for reform
Understanding the OTS's capital gains tax review
 Credit: Pexels/Pixabay

In July 2020, Chancellor Rishi Sunak asked the Office of Tax Simplification (OTS) to review capital gains tax.

Given that the OTS has been asked by the government to undertake a number of reviews in recent years, this might have seemed an ordinary request as part of the ongoing work of the OTS.

However, at a time when there is clearly a need to raise tax revenues, many saw this as a sign that CGT was on the chancellor’s hit list for post pandemic tax increases.

This view was given more credence by the fact that scoping document for the review listed several areas where tax rises would be simple to implement (see box below): it is very unusual for the OTS to be asked to consider the rates of the tax it is receiving.

However, perhaps the most significant part of the OTS’s brief was to examine how the CGT rules distort taxpayer behaviour and where they no longer achieve their intended purpose: we should all remember that the chancellor ‘reformed’ entrepreneurs’ relief in the Budget because it was no long fit for purpose. 

CGT raises just £8.3bn a year in the UK with only 265,000 taxpayers actually paying it.

So, in comparison with income tax (£130bn) and VAT (£132bn) it is relatively small.

However, as the OTS points out, it is ‘lumpy’: not paid very often but large amounts are collected when it is.

In practice we all know that CGT is a significant concern for clients that has to be managed.

An interesting statistic from the report shows that there is a huge spike in the amount of reported gains just below the level of the annual exemption (currently £12,300) – so clearly gains are being well managed by most advisers.

The OTS report

The OTS decided to split the project into two reports, one on the principles of CGT and another as its main report on the administration and technical points.

The first report on the ‘principles’ of CGT “Simplifying by design” was published on 11 November and sets out a framework of policy choices for the government to consider over four areas:

  • CGT Rates and boundaries
  • The Annual Exempt Amount
  • Business Reliefs
  • CGT interaction with lifetime gifts and Inheritance Tax.

CGT rates and boundaries

Setting tax rates is not as easy as it sounds: it is difficult for governments to strike a balance between simplicity and fairness.

For example, a flat tax rate of CGT would be simple to understand and operate – especially in comparison with the four rates that can currently apply, together with the complex interaction with the income tax basic rate band for the taxpayer.

However, whether it is fair that the wealthy pay the same rate of tax as those less well-off is, naturally, a highly charged question.