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Office of Tax Simplification says CGT proposals have been 'misread'

Office of Tax Simplification says CGT proposals have been 'misread'

The Office of Tax Simplification's tax director has said some people have "misread" the body's recent report on capital gains tax as an endorsement that it should be aligned with income tax.

On this week's FTAdviser Podcast, Bill Dodwell discussed some of the recent reports the body has published for HM Treasury on CGT and IHT, as well as its recent proposals to move the beginning and end of the tax year.

He said the OTS had simply presented chancellor of the Exchequer Rishi Sunak with the choice of aligning the CGT rate or changing the boundary of what is subject to income tax and what is subject to CGT.

Capital gains tax is levied at a lower rate than income tax - for higher rate tax payers their income will be taxed at 40 or 45 per cent but their capital gains will be taxed at 20 per cent.

This led to concerns that aligning the rates could lead to a large rise in CGT rates.

Dodwell said: "The question we really posed back to the chancellor, with some evidence, is that if [he] is concerned that the big difference from capital gains tax rates to income tax rates was meaning that people were [...] seeking to receiving their returns in capital gains form rather than income form, [...] then he's really got two choices: one is to align the rates and the other is to look at the boundary - in other words defining what is subject to capital gains tax and what is subject to income tax.

"We didn't give an answer to either of that. [...] It is not our job to reach those broad political and economic choices but we posed that question to the chancellor and I think some people have misread it."

Dodwell added if the chancellor was minded to align the rates then he would also have to consider relief for inflation, making sure there was a better relief for losses and whether it would drive more people to hold their investments via a company rather than directly.

He said: "The final thing for the chancellor to think about is the so-called lock-in effect. That is an economic point that basically says because capital gains tax is paid when you sell something, dispose of something, and not just when it grows in value, you have got a choice as to whether and when you sell, and if the tax charge is too high there is some evidence people tend to hang onto things longer."

Dodwell also discussed the OTS's recent proposals to move the beginning and end of the tax year and whether the OTS would be pursuing the work it has considered conducting on the taxation of trusts.

To listen to the full podcast click play on the player above. FTAdviser's podcasts are also available on Apple Podcasts, Spotify, Stitcher and Acast.

damian.fantato@ft.com