Capital Gains Tax  

What the proposed changes to CGT mean

  • Describe some of the challenges with CGT
  • Explain some of the recommendations from the Office of Tax Simplification
  • Identify the proposed tax treatment of disposal of property
CPD
Approx.30min

The recommendation is to remove these inconsistencies and simply tax the cash when it is received. This is welcomed in principle and would remove the cash flow problems that are created by ‘dry’ tax charges. As ever there are those that would seek to use these rules to their advantage so consideration would need to be given to circumstances where the taxpayer moved abroad, reassigned the consideration or passed away. Hopefully these issues will not outweigh this actually very sensible suggestion.

Standalone recommendations

Divorce and separation

Currently, the CGT treatment on the transfer of assets on divorce and separation depends on the timing. Where transfers are made in the year of separation the transfer is treated as a no gain/no loss transaction and no CGT is due. Transfers after the tax year of separation are at market value and therefore unanticipated tax consequences can arise often affecting the financial settlement.

The ‘transfer window’ is often too narrow to enable financial decisions to be made in time and therefore couples are often hit with a tax charge as well as sizable professional fees.

The OTS has therefore recommended an extension to this window of up to two years following the year of separation, or any reasonable time set for the transfer of assets as part of a court settlement. This solution is much more reflective of today’s world where mediation can often be the preferred way forward and having this derailed by penal tax consequences is not helpful.

Share pooling

Where a taxpayer holds a number of shares in the same company they are pooled as one asset for the purposes of calculating any CGT. Generally, this is not normally a problem until the individual has more than one portfolio. This can then lead to the unravelling of the calculations to pool shares from different investment portfolios resulting in an administrative headache for all concerned.

The recommendation is that shares should simply be pooled within each portfolio. The concern is that this could lead to manipulation of the rules but this is surely very unlikely. 

Debts

Corporate debts are often used when a business is sold as a means of deferred consideration. The type of corporate bond issued dictates the tax treatment when it is ultimately encashed.

Broadly a QCB (qualifying corporate bond) is exempt from tax and therefore any gain arising is fixed at the point of sale and crystallises on encashment. This holds more risk as if the company is unable to repay the bond, the held over gain is still charged. With a non-QCB the gain on sale is held over and the bond takes on the original base cost. Therefore, if the company fail,s the vendor still does not get paid, but does not have a tax charge on the original gain.