The Office of Tax Simplification has recommended the government extend the payment deadlines for Capital Gains Tax for divorcing couples and those selling property.
In its 125-page second report looking at overhauling the CGT system, published last night (May 20), the OTS said it had found many sellers were missing the deadline since it has been cut to 30 days.
Rules introduced in April 2020 meant that a UK resident disposing of a residential property in the UK making a gain which is liable to CGT has 30 calendar days from the date of completion to tell HMRC and pay any tax owed.
But the OTS said this was a “very ambitious target” and had received many “negative responses”.
It found that out of 51,300 CGT returns filed with HM Revenue and Customs between April 6, 2020 and January 6, 2021, 16,800 were filed after the 30-day deadline.
The OTS has called on the government to consider doubling the deadline to 60 days, or to mandate estate agents or conveyancers to distribute HMRC provided information to clients about these requirements.
Richard Jameson, partner in the private wealth team at Saffery Champness, said: “The problems often come with large and relatively-complex transactions such as selling a property, when there is a lot of paperwork and legal hoops to jump through.
“Particularly at a time like this when the property market is very buoyant, conveyancers are in high demand, and delays can be very common. Having all the necessary paperwork ready within 30 days, and the cash available to pay the tax bill at the same time, is just too ambitious for many taxpayers.
“It is little wonder then that a third of the initial returns for residential property disposals exceeded the 30-day CGT deadline, and many individuals who own more than one property will welcome the OTS’s suggestion to extend it to 60 days.”
Rosie Hooper, chartered financial planner at Quilter, agreed, saying that selling a house was a complicated process which comes with lots of fees and charges to solicitors, surveyors, estate agents and others.
Hooper added: “Extending the deadline to pay any CGT on a property sale will provide homeowners with a bit of respite and ensure they can get the finances in order to pay the charge and arrange any reinvestment.”
Divorcing couples
The report also recommended extending the deadline by which divorcing couples are able to claim spousal exemption on CGT when dividing their assets.
Under current rules, married couples or civil partners can transfer their assets between each other without triggering an immediate CGT charge.
This is known as “no gain/no loss”, but if the transfer is made in the next tax year then it is treated as taking place at market value and CGT could be payable.
So, if a couple separate on April 4, 2022 they would only have until April 5, 2022 to transfer their assets without triggering a tax charge.
The OTS has called on the government to extend the ‘no gain no loss’ window on separation to the later of: the end of the tax year at least two years after separation, or any reasonable time set for the transfer of assets in accordance with a financial agreement approved by a court.
For the 2018-19 tax year, HMRC identified £8m of CGT that had been paid by fewer than 300 taxpayers citing divorce or separation in their self assessment tax returns.
While the OTS said this may only impact a small percentage of separating couples, it was “nonetheless important”.
It added: “It is unrealistic to expect separating couples to have resolved their affairs by the end of the tax year of their separation, in part because financial agreements are relevant for a third of divorces, and it is unfair to those without tax advisers.”
Hayley Trim, family law partner at Irwin Mitchell said when a relationship breaks down, tax is rarely the first consideration.
“Even those who give early thought to their future financial arrangements don’t often have in mind that transfers of assets which take place after the tax year of separation may well result in a charge to CGT”, she said.
Trim added: “This creates a timings issue – for instance people separating in March only have until April 5 to finalise any transfers between them. It can lead to pretence about when separation took place and, for those in the know, staying together a bit longer in an attempt to avoid the tax problem.
“If implemented, this change could remove an additional pressure on separating couples and allow them more time to negotiate appropriate financial settlements.”
“If the government is serious about simplifying tax and not encouraging people to change their behaviour because of tax, then this proposal should certainly be followed - we shouldn’t force people to stay together until April 6 just to avoid tax.”
Previous report
Back in November 2020, the OTS recommended that capital gains rates should be more aligned with income tax, their annual allowance reduced and the ‘uplift on death’ removed, among other things.
The first report considered the policy design and principles underpinning the tax, whereas the latest report looked at administrative, technical and practical issues associated with CGT.
But the government has not made any moves to reform the CGT system as of yet.
Laith Khalaf, financial analyst at AJ Bell, said: “The OTS may well feel the chancellor has left them hanging after failing to enact their previous recommendations to increase CGT.
“However, these latest proposals are more technical than ideological, so will not be as controversial to enact.
“Investors shouldn’t entirely discount the potential for changes to CGT further down the road though, and so should still make use of their annual ISA allowance to shelter as much as possible from the taxman.
“Current CGT rates do look low compared to income tax rates, and if the chancellor’s plans to balance the books get blown off course, he’ll start to look for new ways to increase the tax take.”
amy.austin@ft.com
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